What is a salary sacrifice and how does it boost my pension? 

A salary exchange, or salary sacrifice employee benefits scheme allows you to boost your pension.

We explain how the pension salary sacrifice scheme works and look at the benefits of salary sacrifice when planning your pensions and investments.

How salary sacrifice benefits can boost your pension

Giving up part of your salary each month might sound like a strange idea, but it can make financial sense.

Salary sacrifice enables you to exchange part of your salary for a non-cash benefit from your employer, such as increased pension contributions, childcare vouchers, bike to work schemes, bus passes, car schemes etc.  However, the most common use of salary sacrifice is to boost your pension savings and this is what I will concentrate on here.

Traditionally, pension contributions made by an employee to an employer pension scheme were paid from your salary after tax and National Insurance contributions had been deducted and income tax relief was then claimed on these contributions. However, by making these pension contributions via salary sacrifice you are essentially giving up a portion of your salary. This means that although your pension contributions remain the same, you also save employees National Insurance contributions as well as getting full tax relief at source. This is also a benefit for your employer as the salary you earn has reduced and so their National Insurance costs are reduced.

The table below shows the effect of salary sacrifice for contributions to an employer pension scheme where the employee contributions are 5% and employer contributions are 3%.

Position Today

Employee Before salary sacrifice (traditional pension structure) After salary sacrifice
Gross salary £30,000.00 £28,500.00
Income tax £3,486.00 £3,186.00
NIC £2,451.84 £2,271.84
Net annual contribution (5% gross / 4% net) £1,200.00 £0.00
Net pay £22,862.16 £23,042.16 (take home pay increases by £180.00 pa)
Before salary sacrifice After salary sacrifice 
Gross salary £30,000.00 £28,500.00
NIC £2,920.08 £2,713.08
Pension contribution £900.00 £2,400.00
Cost to employer £33,820.08 £33,613.08
Pension Contribution Before salary sacrifice After salary sacrifice 
Employee pension contribution (5%) £1,500.00 £0.00
Employer pension contribution (3%) £900.00 £2,400.00
Pension contribution £2,400.00 £2,400.00

As you can see, where contributions are made via salary sacrifice the total pension contribution (employee and employer) is made up entirely of an employer contribution.

By sacrificing £1,500 of salary (equivalent to the 5% employee pension contribution), the take home pay for the employee is increased by £180 pa and the cost to the employer is reduced by £207 due to the NI savings.

National Insurance rates are set to increase by 1.25% from April 2022 for both employees and employers, to help fund the NHS, including the impact of the pandemic, and the gap in social care costs.  The current rates and rates effective from April 2022 are shown below:

Rates of National Insurance Contributions

Category Main rate (current rate) Rate above higher rate threshold (current rate) Main rate (2022 rate) Rate above higher rate threshold (2022 rate)
Employee NICs 12% 2% 13.25% 3.25%
Self-employed NICs 9% 2% 10.25% 3.25%
Employer NICs
13.80% 13.80% 15.05% 15.05%


With this increase due imminently, salary sacrifice becomes an even more valuable way of paying for benefits like pension contributions due to both the tax and NI savings. Revised figures using the same example above would increase the employee’s net take home pay to £198.75 pa and a total NI saving for the Employer of £226.

In some cases, you might also benefit from more pension contributions from your employer, if they are giving you some or all the money they are saving on NICs.

One word of caution is to be aware that salary sacrifice does of course reduce your salary so if that is likely to be important to you, for example reducing the amount you are able to borrow on a mortgage or other lending purposes, then you should consider this. You also need to watch not reducing your salary too far in case it affects, life cover your employer may provide, or falls below the level at which you pay NICs which could impact State Pensions or other State benefits like Incapacity benefit and maternity pay. These are unlikely to be a major consideration unless your earnings are fairly low, however always look at your own circumstances and if necessary take advice.

As mentioned earlier, salary sacrifice is not just available for pension contributions, but also for other benefits that may be offered by your employer such as car schemes, childcare vouchers, cycle to work schemes. It is therefore a good place to start when considering the employer benefits that are available to you.

Pension planning

Neville Khorshidchehr explains why planning for your retirement is important and how Mercer private Wealth can help.

When reviewing your pension, salary sacrifice is an option that may be available to you. Consider it carefully, the benefits of salary sacrifice can help you boost your retirement income although they may mean less money in your pocket each month. A salary sacrifice scheme is a long-term option worth bearing in mind.
Claire Keen

Financial planner, Mercer

Claire Keen
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