To put it into perspective, for every employee earning £40,000, that's roughly an extra £1,000 per year in NI contributions compared to the 2024/25 tax year. Many companies are feeling the pinch and making provisions help mitigate the increased costs/impact this may have to their business.
To soften at least part of the blow many companies have turned to Salary Sacrifice.
What is Salary Sacrifice/Exchange?
Instead of employees contributing to their pension out of their net pay, Salary Sacrifice allows them to give up a portion of their gross salary. That sacrificed amount then goes straight into their pension pot. Since their taxable income is now lower, both the employee and employer pay less National Insurance.
For the business, this helps them as it lowers the employee’s gross salary so they are paying National Insurance on a lower amount. For the employee, this enables them to take up a higher pay packet at the end of it. The reason being is because the sacrificed element of their salary does not have income tax or National Insurance applied to it so it effectively reduces their taxable income.
However, although a great tool it needs to be implemented with care. Lowering a salary can affect Loan applications (as many lenders look at gross pay), maternity and redundancy pay and minimum wage compliance (you can't sacrifice below this threshold).
What is admissible within Salary Sacrifice/Exchange?
It is not just Pension schemes in which Salary Sacrifice can be used for. The HMRC also allow it to be used for:
- Workplace nurseries
- Cycle to work schemes
- Payroll Giving
- Electric Car Schemes
A lot of these benefits can be cost neutral for employers but by having them, it adds an additional dimension their benefits package to assist with the recruitment and retention of a business’s top talent.
Development Opportunities for Pension Schemes
Looking wider than Salary Sacrifice, what could also be great for Workplace Pension schemes could be a market that builds upon the ancillary benefits that are available to its members – making pensions less like a tick box and more like a genuine benefit that people recognise.
Many employees, especially younger ones, don't feel an emotional connection to their pension. It’s often something they know they should contribute to, but other expenses take priority.
How can this be addressed so the bigger picture can be seen?
- Education - many schemes have tools to assist with financial wellbeing including calculators to work out the level of contributions members need put into their pension.
- Relevance – some providers give members a financial wellbeing questionnaire which runs through typical milestones/life events they may have - such as buying a house and starting a family - and gives ideas on how to save for them taking into account their personal circumstance – helping members understand how pensions ties into life goals.
- Transparency & choice – Defaults certainly serve a purpose but in doing so pensions are often invested in their employer’s pension scheme lifestyle fund. Giving employees more financial awareness may also lead them explore to alternative funds such as ESG investments or even crypto options like Bitcoin, which has been highly publicised recently.
And let’s not forget - Pensions Dashboard – already onboarding for larger schemes and then rolling out over the next few years - a platform which will provide clearer visibility for members to see how much they have amassed toward their retirement. This could potentially be a game changer for pensions – when people can see what they have in black-and-white, they are far more likely to engage with their retirement planning and it should make it easier for them to make better informed plans - all leading to a higher level of financial wellbeing.
National Insurance increases are frustrating. But they’ve also prompted a valuable shift in how companies approach employee benefits. Salary Sacrifice isn’t just a workaround—it’s a stepping stone to smarter, more cost-effective, and meaningful way to support members.
As always, the key lies in communication. When employees understand the perks, they’re far more likely to use them. And that, ultimately, benefits everyone.
John Mullally, Group Risk and Healthcare Consultant - Cartwright Employee Rewards
