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Salary sacrifice

What is salary sacrifice?

Salary sacrifice, sometimes called salary exchange, is a tax-efficient way for you to make contributions to your workplace pension. Your employees agree to give up part of their salary in return for pension contributions and both you and your employees pay lower National Insurance contributions. 

Salary sacrifice is a common way for employers like you to save money and help your employees pay more into their pension pot or increase their
take-home pay.

How do you benefit?

At Nest, we understand how rising costs might be affecting your business and your employees. With salary sacrifice everyone can save. As your employees are sacrificing part of their salary, both you and your employees pay less in National Insurance contributions.

You could use these savings to:

  • Pay more into your employees’ pension pots and help them save even more for the future.
  • Increase your employees’ take-home pay.
  • Offer an improved benefits’ package to your employees.
  • Reinvest the money you’ve saved back into your business.

Employees in the higher 40% income tax bracket will no longer need to claim back additional tax relief directly from HMRC if they switch to salary sacrifice.

How much can you save?

The table below provides an example of savings your business could make. The example is based on the annual salary of an employee and the number of people employed.

Source: Nest January 2024. The calculations assume that the employee is sacrificing the legal minimum contribution of 5% on a qualifying earnings basis.

Is salary sacrifice right for you and your employees?

It’s important to consider that salary sacrifice may not be appropriate for everyone.

  • You cannot include employees in a salary sacrifice arrangement if it takes them below the National Minimum Wage. You will need to monitor this on an ongoing basis.
  • It may affect your employees’ entitlement to state benefits. 
  • Some employees may be concerned that it will impact on their ability to secure a loan or mortgage, although most providers take salary sacrifice into account.
  • It may impact other benefits you provide such as life insurance, overtime rates, bonus or commission payments.

What else do you need to think about?

If salary sacrifice is right for you, there are a few more things you’ll need to consider before setting up:

  • What changes will you need to make to set salary sacrifice up with your payroll provider?
  • For employees who don’t agree or are not eligible for salary sacrifice, you’ll need to take their employees’ pension contributions in the usual way.
  • Salary sacrifice is a contractual agreement involving a change to an employee’s contract of employment. Your employees will need to agree to the change, so you’ll need to think about how you explain it to them. You may need to have a formal consultation with employees to explain the changes. 

Remember, salary sacrifice affects your employee’s terms and conditions of employment and is a matter of employment law, not tax or pensions law. If you are unsure, an employment lawyer, or specialist tax adviser could help you decide. You can also find more information at:

Setting up salary sacrifice

If you’ve decided salary sacrifice is right for your business, you or your payroll provider will need to set up a salary sacrifice worker group in your online Nest account. Make sure this is set up so all contributions are paid as employer contributions only and that the worker group is named accordingly, for example, ‘Salary sacrifice’. Employers still need to keep a worker group for those employees that don’t want to or are unable to be part of the salary sacrifice arrangement. We operate pensions tax relief on a relief-at-source basis for members who are not part of a salary sacrifice arrangement. 

man and woman working at laptop

Submitting contributions

In a salary sacrifice arrangement, the employee’s share of the pension contribution is treated as an employer contribution.

How to submit contributions for salary sacrifice 

Enrolling your workers

We're here to help with enrolling your workers.

How to enrol workers manually online


About tax relief

If you and your worker are in a salary sacrifice arrangement, the contributions will be paid as employer contributions and we won't be claiming any tax relief. 

How is tax relief calculated?