Why use salary or bonus sacrifice for pension funding?

Pension contributions funded by the sacrifice are treated as employer contributions. Using an effective salary or bonus sacrifice arrangement to fund an employee’s pension, rather than the employee paying pension contributions from their salary, can produce significant financial benefits for both the employee and employer – although there can also be drawbacks in some circumstances.

Pension Retirement

Employee benefits from salary or bonus sacrifice

Cutting an employee’s earnings usually means they’ll pay less income tax and National Insurance (NI) than before.

  • There will only be NI savings on earnings sacrificed above the earnings threshold (as no NI is paid on earnings below this level).
  • Cuts in earnings above the upper earnings limit produce a 2% NI saving for the employee.
  • Cuts in earnings between the earnings threshold and the upper earnings limit normally produce a NI saving for the employee of 12%.
  • It normally isn’t possible for employees to give up all of their salary under a salary sacrifice agreement – they must normally be paid at least the national living wage (or national minimum wage if under age 25). The only exception is where the benefit provided by the employer is accommodation. However, this restriction doesn’t apply to company directors.
  • Employees start to lose their personal tax allowance when their adjusted net income goes over £100,000, but they can retain it by making personal contributions to a pension scheme and get an effective rate of tax relief of 60%. However, if the contributions are made by salary sacrifice, the effective rate of relief could be as much as 66%.

Because employee pension contributions qualify for tax relief anyway, using salary or bonus sacrifice to fund an employer pension contribution doesn’t produce an additional income tax saving. However:

  • Where employee pension contributions are paid under the relief at source system (as applies to personal pensions and SIPPs), using a sacrifice agreement to fund the pension instead has the advantage of effectively giving the benefit of any higher rate tax relief immediately.
  • Also, because there’s an NI saving from an effective sacrifice agreement, the same pension contribution can be made at less cost to the employee – giving them a larger net take home pay. Alternatively, a larger pension contribution can be made without affecting the employee’s net take home pay. This in turn saves more NI, but also now creates a saving in tax, which allows a greater sacrifice… And so it continues.

With the Scottish Government introducing new income tax rates and bands on 6 April 2018 – the overall effect of salary sacrifice for Scottish taxpayers may differ from taxpayers in the rest of the UK.


As National Insurance limits are set by the UK Government – aligned with the UK’s higher rate tax threshold – Scottish taxpayers will be effectively taxed at 53% on earnings between £43,430 and £46,350 (compared to 32% for their UK counterpart) in 2018/19. Using salary sacrifice, on these earnings, is one way of immediately benefitting from the effect of higher rate tax relief and the NI saving.

Employer benefits from salary or bonus sacrifice

Cutting an employee’s earnings usually means the employer will pay less NI than before.

  • An employer usually has to pay NI on all earnings above the earnings threshold, so they will normally see a saving of 13.8% of the sacrificed amount. But note employer NI contributions are different for employees under 21 and apprentices under 25.  
  • Employers often agree to share part of this saving with the employee, for example by way of a boost to their pension contribution for the employee, to increase the appeal of the salary or bonus sacrifice facility.
  • Another benefit for the employer is that many employees see the flexibility of having salary or bonus sacrifice arrangements available as a valuable benefit, which can help retain staff.

Example: the benefits of salary sacrifice

Consider an employee earning £25,000 for the tax year 2017/18, who wants to contribute £100 a month (gross) to his SIPP. Table 1 below shows three different ways of funding the SIPP contribution and how the employee can benefit by using salary sacrifice.

  • Column A shows the position if the employee makes the contributions personally from salary.
  • Column B shows the position if the employee’s salary is cut by the amount of the gross contribution, which the employer pays into the SIPP. This gives the same pension contribution, but leaves the employee with more take home pay.
  • Column C shows the position if the employee’s salary is cut to the amount which leaves the same take home pay, with the employer paying the sacrificed salary into the SIPP. This gives a larger pension contribution without affecting the employee’s take home pay.

Table 1 - how the employee can benefit:

Retirement funding


Table 2 shows the employer’s position for each of the three options and the amount of employer NI that can be saved.

Table 2 - how the employer can benefit:

As can be seen from the above, when the employee sacrifices some salary the employer saves NI, which reduces the net cost of the employee’s remuneration package. If the employer is willing to maintain the overall value of the employee’s package, it can pay the amount of NI saved into the pension arrangement – thus increasing the effectiveness of the sacrifice.

Savvy Financial Planning, Hinton Business Park, Tarrant Hinton, Blandford Forum, Dorset, DT11 8JF