Looking for a smart way to boost pension contributions while cutting National Insurance costs? A salary sacrifice scheme might be the answer – but it’s not without its complexities.
How it works
When an employee joins a salary sacrifice scheme for pension contributions, they agree to reduce their gross salary. In return, their employer increases its pension contributions by the same amount. The overall pension pot stays the same — but here’s the clever bit:
✔️ Both the employee and employer save on National Insurance Contributions (NICs)
✔️ The pension contributions made by the employer are exempt from NICs and not caught by salary sacrifice restrictions
This can result in significant savings, particularly for employers, who may choose to pass on some (or all) of their NIC savings by boosting staff pension contributions even further.
Things to consider before setting up a scheme
While the tax and NI savings are attractive, there are a few important considerations:
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Minimum Wage compliance – You’ll need to make sure the employee’s reduced salary doesn’t dip below the National Minimum Wage
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Auto Enrolment rules – Salary sacrifice must be carefully structured to avoid falling foul of pension auto enrolment obligations
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Extra admin – There will be contractual changes and ongoing payroll implications to manage
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Impact on staff benefits – A lower gross salary may affect entitlement to statutory payments (like sick pay or maternity) and even bonuses or mortgage applications
Communication is key
To make a salary sacrifice scheme successful, it’s essential to communicate clearly with your team. Employees need to understand how it affects their take-home pay, pensions, and any pay-related entitlements.
Thinking of setting up a pension salary sacrifice scheme for your business?
At A&C Chartered Accountants, we can walk you through the pros, cons, and practical steps to help you implement it smoothly — and compliantly.
👉 Get in touch to find out if it’s the right fit for your business.