How Does Salary Sacrifice Work? UK Pension Guide 2026/27

From April 2025, employers pay Class 1 secondary NICs at 15% on earnings above the secondary threshold (£5,000 per year for 2026/27). When an employee sacrifices salary, the employer no longer has to pay 15% NIC on the sacrificed amount.

This means that for every £1,000 an employee sacrifices, the employer saves £150 in NICs. Across a workforce of even modest size, these savings can be substantial. Many employers choose to share some or all of this saving with employees by topping up the pension contribution further, making the scheme even more attractive.

Employees also benefit from reduced NICs. For 2026/27, employee Class 1 NIC rates are:

• 8% on earnings between the primary threshold (£12,570) and the upper earnings limit (£50,270).
• 2% on earnings above £50,270.

If the sacrificed salary falls within the 8% band, the employee saves 8p in NIC for every £1 sacrificed. On top of that, because the salary reduction happens before PAYE, the employee also saves Income Tax at their marginal rate — 20% for basic-rate taxpayers, 40% for higher-rate taxpayers, or 45% for additional-rate taxpayers.

Combined, a basic-rate taxpayer saves 28% (20% tax + 8% NIC) on every pound sacrificed in the main NIC band. A higher-rate taxpayer saves 42% (40% + 2%) on earnings above £50,270, or 48% (40% + 8%) on the portion that falls in the main NIC band.

Under a normal employee pension contribution with relief at source, employees only receive tax relief — they still pay full NICs. Salary sacrifice therefore provides an additional NIC saving that is not available through the standard route.

Let’s compare a standard employee pension contribution against salary sacrifice for an employee earning £30,000 with a 5% (£1,500) pension contribution. We assume the employer contributes 3% (£900) regardless of method.

Without Salary Sacrifice (Relief at Source)

Item	Amount
Gross salary	£30,000
Employee pension contribution (5%)	£1,500 (deducted from net pay; £1,200 from employee + £300 tax relief at source)
Taxable pay	£28,500 (after basic-rate relief)
NIC-able pay	£30,000 (full salary)
Employee NIC (8% on £17,430)	£1,394.40
Income Tax (20% on £15,930)	£3,186.00
Take-home pay (approx.)	£24,219.60
Employer NIC (15% on £25,000)	£3,750.00

With Salary Sacrifice

Item	Amount
Original gross salary	£30,000
Salary sacrificed (5%)	£1,500
New contractual salary	£28,500
Employee pension contribution	£0 (now an employer contribution)
Taxable pay / NIC-able pay	£28,500
Employee NIC (8% on £15,930)	£1,274.40
Income Tax (20% on £15,930)	£3,186.00
Take-home pay (approx.)	£24,039.60
Employer NIC (15% on £23,500)	£3,525.00

Summary of Savings

Saving	Amount per year
Employee NIC saving	£120.00
Employer NIC saving	£225.00
Total NIC saving	£345.00

Note that with salary sacrifice, the employee’s take-home pay is very similar, but £120 of NIC savings could be redirected into additional pension contributions. If the employer shares its £225 saving, the employee’s pension pot grows even further. Use our workplace pension calculator to model the exact savings for your situation.

Because salary sacrifice reduces contractual gross pay, it can affect a range of other calculations and entitlements. Employers and employees should be aware of the following:

Mortgage Applications

Mortgage lenders typically assess affordability based on gross salary. A reduced contractual salary could lower the amount an employee can borrow. Some lenders will accept a letter from the employer confirming the pre-sacrifice salary, but not all. Employees who are planning to apply for a mortgage may wish to temporarily opt out of salary sacrifice, if the scheme allows it.

Statutory Payments

Statutory Maternity Pay (SMP), Statutory Paternity Pay (SPP), Statutory Sick Pay (SSP), and Shared Parental Pay are all calculated based on the employee’s reduced (post-sacrifice) earnings. This can result in lower statutory payments. Employers should consider whether to offer a “lifestyle event” opt-out that allows employees to revert to their original salary before these events.

Student Loan Repayments

Student loan repayments are calculated on gross pay after salary sacrifice. This means employees with student loans will repay slightly less each month, as their earnings for student loan purposes are lower. Whether this is beneficial depends on the individual’s loan balance and repayment timeline.

Life Insurance and Death-in-Service Benefits

If death-in-service or life insurance benefits are calculated as a multiple of salary, the reduced salary will produce a lower pay-out. Employers should consider basing these benefits on the pre-sacrifice “reference salary” instead.

There is an important legal constraint on salary sacrifice: an employee’s post-sacrifice salary must not fall below the National Minimum Wage (NMW) or National Living Wage (NLW) for the hours they work. HMRC will treat any arrangement that brings pay below NMW as ineffective, and the employer could face penalties.

For 2026/27, the National Living Wage (for workers aged 21 and over) is £12.21 per hour. Employers must check that no employee’s post-sacrifice hourly rate drops below this threshold. This is particularly relevant for lower-paid workers or those with high contribution rates. In practice, many schemes set a floor so that employees earning close to NMW are automatically excluded or have their sacrifice rate capped.

Implementing salary sacrifice requires careful planning and proper documentation. Here are the key steps:

• Consult your pension provider: Not all pension schemes support salary sacrifice. Check that your provider can accommodate the arrangement and understand any administrative requirements.
• Amend contracts of employment: A salary sacrifice arrangement requires a genuine contractual change. Each participating employee must agree in writing to reduce their salary. A simple exchange of letters or a signed agreement is sufficient.
• Communicate clearly: Employees need to understand the implications, including effects on statutory payments, mortgage applications, and other benefits. Provide worked examples and a clear FAQ document.
• Update payroll systems: Your payroll software needs to be configured to process the reduced salary and increased employer pension contributions correctly.
• Set review periods: Most schemes allow employees to opt in or out at set intervals (typically annually) or on the occurrence of a “lifestyle event” (marriage, birth of a child, partner losing their job, etc.).
• Consider auto-enrolment interactions: If you use salary sacrifice for auto-enrolment contributions, ensure you are still meeting your minimum contribution obligations based on the employee’s qualifying earnings.

HMRC requires that a salary sacrifice arrangement is a genuine, prospective change to the terms of employment. This means:

• The salary reduction must apply to future earnings, not retrospectively.
• The employee must have a genuine choice — it cannot be compulsory (although it can be the default option with an opt-out).
• The arrangement must be documented in writing, ideally as a variation to the employment contract.
• The employee’s reduced salary becomes their actual contractual salary for all purposes, including redundancy calculations, unless specified otherwise.

Employers must also be aware that HMRC can challenge salary sacrifice arrangements that it considers to be “sham” arrangements — for instance, if the employee can opt out at any time without restriction, or if the salary is not genuinely reduced for all purposes.

Salary sacrifice is not always the right choice. Consider the following scenarios where it may be disadvantageous:

• Earnings near the National Minimum Wage: If an employee’s post-sacrifice pay would fall below NMW, the arrangement is not permitted. Even if it remains just above NMW, the reduced salary may cause financial hardship.
• Imminent mortgage application: The reduced contractual salary can limit borrowing capacity. Employees planning to buy a home in the near future may want to delay opting in.
• Expecting statutory payments: Employees who anticipate taking maternity, paternity, or extended sick leave should weigh the NIC saving against the reduction in statutory pay. The loss in SMP over 39 weeks can outweigh the annual NIC saving in some cases.
• Earnings below the primary threshold: Employees earning below the NIC primary threshold (£12,570 for 2026/27) are not paying NICs anyway, so there is no NIC saving from salary sacrifice. Tax relief via relief at source or net pay may be more straightforward.
• State pension and benefit entitlement: Although unlikely for most workers, if salary sacrifice reduces earnings below the lower earnings limit (£6,396 for 2026/27), the employee may not accrue a qualifying year for State Pension purposes.
• Complex administration for small employers: The contractual changes, payroll adjustments, and communication effort may not justify the savings for very small employers with only a handful of employees.

For the majority of employers and employees, salary sacrifice pensions represent a genuine win-win. Employers reduce their NIC bill and can use part of the saving to boost employee pensions, while employees benefit from lower tax and NIC on their contributions. The key is proper implementation: clear communication, robust contractual documentation, and awareness of the edge cases where salary sacrifice may not be appropriate.

To see exactly how much you and your employees could save with salary sacrifice, try our workplace pension calculator. It allows you to model different salary levels, contribution rates, and sacrifice arrangements to find the optimal setup for your workforce.