Changes to the rate of UK employers’ National Insurance from 13.8% to 15% from 6 April 2025 may prompt employers who have not already done so to consider implementing salary sacrifice arrangements, particularly in relation to registered pension plans.
What is pension salary sacrifice?
In exchange for a reduction in an employee’s gross salary, a company can provide an equivalent non-cash benefit to the employee by way of an enhanced employer contribution into a registered pension plan.
National insurance contributions savings for the employer and employee
The non-cash benefit may allow both the employee and the employer to make savings. The employee will benefit from income tax relief up to their marginal rate as well as save on Class 1 Primary National Insurance contributions (NICs) at 8% for earnings between £1,048 and £4,189 per month and 2% for any excess earnings. The employer will save class on Class 1 Secondary NICs at 15% of earnings above £417 per month per employee.
What about the income tax position?
Ordinarily, employees already receive tax relief on savings into registered pension schemes by either or both of:
- Relief at Source: the pension provider claims 20% tax relief on the employee’s behalf from the government; or,
- Net Pay: an employee’s salary is reduced before tax is deducted to give full tax relief at an employee’s marginal rate.
With either method, basic rate taxpayers receive relief immediately. For higher and additional rate taxpayers, the benefits for income tax are one of timing. It is possible to get a full relief by filing a tax return, but an employee will need to wait until after the tax year ends before they can file.
Salary sacrifice arrangements mean that the employer pays a sum into the pension scheme instead of and equal to the employee contribution (this is in addition to any employer contribution that it was already making). All employer contributions are tax-free to the same extent as any employee contribution. So, while there are no income tax savings to be made, salary sacrifice simplifies the process for obtaining the tax relief as no application for relief needs is required (this is likely to benefit higher rate taxpayers the most). Where contributions are made in successive years, tax relief may be given by adjusting the employee’s tax code, so higher and additional rate tax payers would receive relief based on estimated contributions immediately.“
Who benefits the most from Salary Sacrifice?
Employers stand to benefit the most from salary sacrifice because of the 15% employers’ NICs savings it offers. Employees also benefit from employees’ NICs savings amounting to 8% for basic rate taxpayers and 2% for higher and additional rate taxpayers.
Passing on employer savings
As the party with the most to gain, employers may wish to pass on some or all of the 15% to incentivise employees to participate, especially for higher and additional rate taxpayers who only stand to benefit from a 2% NICs saving.
How does pension salary sacrifice work?
To enter into a salary sacrifice arrangement, the employee needs to agree to a formal variation of their employment contract to give up an amount of salary in exchange for an enhanced employer contribution into a registered pension scheme of the same amount.
To benefit from the employee and employer NICs savings mentioned above, the employee needs to waive their right to the cash they give up before it is “received” for tax purposes. For non-director employees, this is the earlier of:
- When the employee becomes entitled to the income; or
- When it is paid
(Note: There are different rules around when an employee who is a director is deemed to “receive” a payment of salary for tax purposes).
Pension salary sacrifice design considerations
When deciding whether or not to implement any salary sacrifice arrangement for employees, an employer will need to consider a number of issues.
Gross v Notional salary
Statutory payments to employees that are calculated based on an employee’s average weekly earnings will be affected by the new reduced gross salary an employee receives after salary sacrifice. Examples of such payments are statutory maternity and paternity pay.
Where the employment contract has been effectively varied to change the employee’s entitled to salary/wages and benefits, HMRC confirms that employers can treat other benefits and payments to employees on a “notional” (that is, pre-sacrifice) or actual gross (post-sacrifice) basis without affecting the tax treatment of the sacrificed salary.
Therefore, employers need to take into account whether they will allow the notional or new actual gross salary to be used when calculating, for example:
- Death in service benefits
- Other health insurance benefits
- Enhanced company pay for statutory leave
- Company redundancy pay
- Pay rises and bonuses
- Ordinary pension contributions made by both parties under the pension plan
Before a final decision is made, any third-party benefit providers will need to be contacted to confirm they will accept the use of notional salary rather than gross salary.
Alternative pension provision
Salary sacrifice cannot be a condition for employees to participate in the workplace pension. To comply with its auto-enrolment obligations, an employer must provide an alternative pension plan option for employees who do not want to participate in salary sacrifice. An employer would need to contact their pension provider for more information on how to facilitate alternative pension provision, for example, setting up two groups in the pension plan (one with and one without salary sacrifice).
Corporation tax implications
When planning salary sacrifice implementation, employers should be aware that they can claim a deduction for corporation tax purposes on the additional enhanced pension contribution made under salary sacrifice. However, the relief may be spread over a number of months or years which may affect the cost effectiveness of establishing salary sacrifice for corporation tax purposes.
How we can help
We regularly assist employers with implementing salary sacrifice arrangements, from modelling potential savings and addressing key design issues to providing employee communications and contractual variation documentation to implement the arrangement.
If you are interested in discussing the issues raised above and want to see if salary sacrifice is appropriate for your company, please feel free to contact us.
