Salary sacrifice is one of those workplace benefits that sounds technical but can deliver real financial advantages for both employees and employers when set up correctly.
In this blog, we explain what salary sacrifice is, how it works in practice, the key benefits for employees and employers, and how upcoming Companies House fee changes may affect business budgeting.
What Is Salary Sacrifice?
Salary sacrifice is an arrangement between an employee and employer where the employee agrees to give up part of their gross salary in exchange for a non‑cash benefit. Because the salary is reduced before tax and National Insurance (NI) are calculated, this can create savings for both parties.
Common salary sacrifice benefits include:
- Pension contributions
- Cycle‑to‑Work schemes
- Ultra‑low‑emission company cars
- Childcare support (for those still eligible under legacy schemes)
It’s important to note that salary sacrifice arrangements must not reduce pay below the National Minimum Wage. Employers are responsible for monitoring this.
How Salary Sacrifice Works in Practice
Rather than paying an employee their full salary in cash, the employer provides a benefit of equivalent value. The employee’s contractual salary is reduced, and tax and National Insurance are calculated on the lower amount.
For example, instead of receiving £35,000 in salary, an employee might agree to earn £33,000 and have £2,000 paid directly into their pension.
Benefits of Salary Sacrifice for Employees
1. National Insurance Savings
One of the main advantages for employees is reduced National Insurance contributions. Because NI is calculated on a lower salary, employees may take home more overall value compared with receiving the same amount as cash pay.
This is particularly valuable for pension contributions, where more money goes straight into long‑term savings.
2. Tax‑Efficient Benefits
Some benefits offered through salary sacrifice provide better tax treatment than buying them personally. This can make workplace benefits more affordable and accessible.
3. Managing Adjusted Net Income
Salary sacrifice can reduce an employee’s adjusted net income, which may help with eligibility for certain allowances or childcare support thresholds.
Benefits of Salary Sacrifice for Employers
1. Employer National Insurance Savings
Employers also save on National Insurance contributions when employees sacrifice salary. These savings can be significant across a workforce and can help offset the cost of providing benefits.
2. Attractive Employee Benefits Packages
Offering salary sacrifice arrangements can make a business more competitive when recruiting and retaining staff, particularly when combined with pension contributions and sustainable benefits.
3. Flexible and Cost‑Effective Rewards
Salary sacrifice allows employers to offer enhanced benefits without increasing headline salaries, helping manage payroll costs while still supporting employee wellbeing.
Important Future Change: Pension Salary Sacrifice from April 2029
While salary sacrifice remains beneficial, an important change is coming.
From April 2029, the government will cap National Insurance savings linked to pension contributions made via salary sacrifice at £2,000 per year.
What this means:
- The first £2,000 of pension contributions made via salary sacrifice each tax year will continue to benefit from NI savings for both employees and employers.
- Any pension contributions above £2,000 will no longer receive NI savings, although pension tax relief will still apply.
This change does not remove salary sacrifice pension schemes, but it may reduce the financial advantage for higher earners and employers making larger contributions.
Businesses should review their reward strategies well ahead of 2029 to understand the long‑term impact.
What Employers Should Do Now
- Review existing salary sacrifice arrangements to ensure compliance with National Minimum Wage rules
- Communicate clearly with employees about how salary sacrifice affects pay and benefits
- Consider how the 2029 pension NI cap may influence future reward strategies
What Employees Should Check
- Understand how salary sacrifice affects your payslip and take‑home pay
- Ask how pension contributions may be impacted by the 2029 NI changes
- Review benefit options regularly to ensure they still suit your personal circumstances
What This Means for Your Business
Salary sacrifice remains a powerful and tax‑efficient tool for both employers and employees in the UK. While changes are coming in the future, the current benefits are still significant when schemes are set up and communicated correctly.
As with all tax and payroll matters, professional advice can help ensure arrangements remain compliant, cost‑effective and aligned with your wider business goals.
If you would like help reviewing or implementing salary sacrifice schemes, or understanding how regulatory changes affect your business, our team is here to help.
Get in touch with us today if you have any questions.
Email us info@future-cloud.co.uk
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