How do salary sacrifice pensions work and what are the benefits to employers?

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With end-of-year-bonus season fast approaching, a salary sacrifice pension could be good way for employees to keep more of their bonus. And with employer National Insurance set to rise following the recent Autumn Budget announcements, it could be a more attractive option for employers too. Our guide explains all.

If one thing is clear from our Retirement Voice 2024 research, it’s that people continue to feel worried about their financial future.

Indeed, more than half (51%) of people are worried they’re not saving enough now for when they’re older. Meanwhile, 45% of Gen Xers – those aged 44–59 – think they’ll  have a worse standard of living in retirement.

As we approach end-of-year-bonus season, the bumper pay day could provide a welcome respite. And for those who are worried about their financial situation, using salary sacrifice could make their money go further – and help give their financial wellbeing a much-needed boost.

What are the benefits of a salary sacrifice pension for employees?

Because part of an employee’s salary is exchanged for a pension contribution, their salary is reduced – meaning they’ll pay less in tax and National Insurance (NI). As a result, they get to keep more of their take-home pay whilst still saving into their workplace pension scheme. 

Employees’ pension pots could grow faster too. That’s because both employees and employers can pay the tax savings into the employee’s pension pot.

What are the disadvantages of salary sacrifice for employees?

Salary sacrifice won’t be suitable for everyone. 

That’s because having a lower salary could lower the amount that employees can borrow for loans or mortgages. Paying less in NI contributions could also affect their entitlement to benefits such as Statutory Maternity Pay and the State Pension.

So if your organisation offers salary sacrifice, it’s important to communicate all the facts to your employees so they can make a decision that’s right for them.

What about bonus sacrifice?

If employees get an end-of-year bonus, they can use salary sacrifice – or ‘bonus sacrifice’ – to put some or all of it into their pension plan. 

It effectively works in the same way as normal salary sacrifice, in that the employer pays the amount directly into an employee’s workplace pension scheme. That also means employees can keep more of their bonus, because they’ll be paying less in tax and NI. 

How do employers benefit from salary sacrifice?

Offering salary sacrifice could be a win-win for both you and your employees. Here are a few reasons why:

Employers save on NI contributions too

Depending on how many members are in your workplace pension scheme, using salary sacrifice could lead to tens of thousands of pounds worth of annual NI savings – which could be reinvested back into the business.

Or you could choose to pass these savings onto your employees by paying the money into their workplace pension plan. This could give them peace of mind today that they’ll have more money to live off tomorrow. 

Using salary sacrifice could be a particularly attractive option following the recent Autumn Budget announcements. Employer NI is set to rise to 15% from April 2025, and the threshold at which NI gets paid is also going down from £9,100 per year to £5,000. By using salary sacrifice, employers can offset these additional costs.

Reduced impact of financial stress

Money worries can impact your employees’ mental health, which could have a knock-on effect on their productivity at work. Given that a salary sacrifice pension increases employees’ take-home pay, it could provide a much-needed boost to both their pockets and wellbeing. 

Standard Life workplace pension scheme members can also get financial wellbeing support through our Money Mindset app. It allows them to see their pay, pensions, and other financial accounts in real time, helping them feel more in control of where their money’s going.

Improved recruitment and retention 

Whilst salary sacrifice is a great employee benefit, offering bonus sacrifice in particular could make you stand out from the crowd when recruiting. Employers aren’t obliged to offer it, so if you do, it could be a unique selling point to tempt job searchers to apply. 

The same goes for your existing staff too; they’ll be more likely to stay put if you offer a comprehensive and flexible employee benefits package.

For more information on financial wellbeing, including resources on how you can help support your employees, take a look at our Financial Wellbeing hub and read our articles.