A salary sacrifice pension scheme allows employees to reduce their gross salary in exchange for an equivalent employer pension contribution. Instead of receiving salary and then contributing to a pension, the sacrificed amount is contributed directly by the employer.
Benefits:
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Employees save on income tax and National Insurance
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Employers reduce their NI liability and can reinvest those savings
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Pension pots grow faster due to higher contributions
How to Set Up a Salary Sacrifice Pension Scheme
1. Check Eligibility and Legal Requirements
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After salary sacrifice is applied, the employee’s reduced gross pay must not fall below the National Minimum Wage (NMW) or National Living Wage (NLW) thresholds
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Salary sacrifice is not permitted if pay falls below these statutory minimums
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Review eligibility carefully for lower-paid or part-time employees
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Ensure the arrangement doesn’t negatively impact statutory entitlements (e.g., sick pay, maternity pay, redundancy pay)
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Employers must regularly monitor wage levels—especially when NMW increases
💡 Please consult your pension provider before setting up the scheme to ensure all details are understood
2. Choose the Scheme Structure
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Decide whether salary sacrifice will be optional or contractual
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Optional arrangements are generally more flexible and preferred by employees
3. Consult Your Pension Provider
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Confirm they accept employer-only contributions
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They can help calculate tax efficiencies and provide required documentation
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Ask for advice on how best to communicate the scheme to employees
How to Update This in UK Payroll
Amend an Existing Pension Scheme
If your provider is already set up in UK Payroll:
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Go to Settings > Pensions
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Select the relevant pension scheme
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Tick "Salary Sacrifice" to enable it
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(Optional) Tick "Percentage of employer NI savings to be added to employee pension pots" to pass some or all NI savings to the employee
What Are Employer NI Savings?
When an employee sacrifices part of their salary, the employer pays less National Insurance. These savings can be reinvested into the employee’s pension.
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You can choose to contribute between 1% and 100% of your NI savings
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This enhances your pension offering at no extra cost to the employee, the additional NI saving will be added on top of the standard Employer pension contribution amount each period.
Add a New Pension Scheme
If the scheme isn't yet set up in your UK Payroll system:
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Follow the steps in this article to add it manually
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Setup is quick and straightforward
If you need help setting up or managing a salary sacrifice pension scheme, feel free to reach out—we’re happy to help.
