Businesses in the UK will be facing a plethora of cost increases from the new tax year, with the increase to the National Living Wage rate, the reduced threshold before employer National Insurance is payable and the increased rate of employer National Insurance to 15%. Savvy employers will be looking at ways to cut costs in face of this economic backdrop.
Salary sacrifice is not new, but it’s now more important for businesses to take note, as they could save thousands of pounds off the wage bill. Towergate Employee Benefits’ annual research1 shows that less than half (48%) of UK companies offer salary sacrifice on their pension provision. The likelihood of companies offering salary sacrifice on their pension provision increases with the size of business. Just 38% of companies with 20 employees or less offer salary sacrifice, this compares to nearly half (49%) of companies with 21-249 employees and over two-thirds (67%) of larger corporates with 250+ employees.
What is pension salary sacrifice?
Salary sacrifice is also known as salary exchange, and this is perhaps a better term as neither the employer nor the employee is actually sacrificing anything. In fact, they both gain from reduced National Insurance contributions and the employee will gain from tax efficiencies.
It is a more cost-effective way for employees to contribute into their pension. It’s a contractual agreement with their employer to exchange part of their salary, in return for that amount to be paid into their pension, as an employer pension contribution.
What is the benefit?
The salary foregone by the employee won’t be subject to Income Tax or National Insurance. This usually results in employee’s take home pay increasing. Employers do not have to pay employer National Insurance either. This is a win-win situation for employers and employees alike.
Many higher rate and additional rate taxpayers are unaware they can often claim additional tax relief from HMRC on their pension contributions. Pension salary sacrifice negates the need for this as employees receive immediate tax relief, thus being a further incentive for employees to take up this approach.
Towergate Employee Benefits’ salary sacrifice savings calculator shows, for example, that for a typical pension member earning £30,000 and paying a 5% contribution, the National Insurance saving per year would be £225 for the employer and £120 for the employee.
This begs the question that if pension salary sacrifice is so beneficial, why aren’t more employers utilising it already? Whilst salary sacrifice is not suitable for those with earnings at or just above the National Living Wage, there are many businesses that are simply unaware, or they may have considered implementation to be too costly or timely for them.
Many advisers support companies of all sizes with implementing salary sacrifice and often their costs can be offset by the initial savings. Employers should, therefore, open themselves to the possibilities and take advice on their pension provision.
For employers who already have salary sacrifice schemes in place for their pensions provision, the increase in National Insurance contributions is an opportunity to review their pension and salary sacrifice arrangements, to ensure that they are compliant and are maximising value and engagement.
There are also other benefits for employers to consider such as salary sacrifice cars and bikes, which can also provide tangible savings for a business, and enhance the benefit offering to employees. These all form part of the employee value proposition and can help to attract and retain staff in this challenging business environment.
- Research conducted by Opinium on behalf of Towergate Employee Benefits among 500 HR decision makers across the UK from 7 to 16 January 2025.
