How Pension Salary Sacrifice Boosts Your SME’s Bottom Line

For Doncaster businesses dealing with more stringent budgets, turbulent cash flow, tighter profit margins and rising wage costs, exploring schemes and opportunities to preserve valuable money becomes a high priority, and one that’s revisited more often than not. 

Recently, pension salary sacrifice schemes have emerged as a practical solution that delivers tangible benefits for both employers and staff. Setting one up could be your ticket to retaining more tax-free money without your employees being worse off. Even with forthcoming changes coming in 2029, in times like these, such an arrangement may be more welcome than disruptive.

What is pension salary sacrifice?

Pension salary sacrifice is an arrangement where employees agree to reduce their gross salary in exchange for an equivalent employer pension contribution. This restructuring moves earnings from taxable income into pension savings before income tax and National Insurance (NI) are calculated.

For example, if an employee earning £30,000 a year sacrifices £2,000, their new taxable salary becomes £28,000. The employer then contributes the full £2,000 directly into their pension pot.

The advantages of pension salary sacrifice for employers

The most noticeable benefit for businesses is the reduction in tax and Employer National Insurance Contributions (NICs). Since April 2025, employers pay a 15% rate on earnings. By sacrificing salary for pension contributions, that 15% is saved on the sacrificed portion. This results in:

• NIC Savings: If 10 employees each sacrifice £2,000 annually, the employer saves £3,000 per year in NICs alone. 

• Corporation Tax: Employer pension contributions qualify as an allowable business expense, which lowers their Corporation Tax bill. At the current 25% rate (for businesses with profits over £250,000), a £20,000 contribution reduces the Corporation Tax owed by £5,000. Smaller enterprises benefit by a slightly more lenient 19% rate.

All in all, this means a mid-size business could save over £8,000 annually on just £20,000 of salary sacrifice; capital that stays within the business to support future growth.

Benefits of salary sacrifice for employees

Under the current 2025/26 rates, employees also stand to gain substantially from salary sacrifice arrangements, with their gross salary being reduced before tax is applied. Someone in the basic rate band would save 28% on every pound sacrificed (20% income tax and 8% employee NICs). Higher rate taxpayers save 42% (40% income tax and 2% NICS). Effectively, employees receive more pension savings for the same net take-home pay, all while growing their pot tax free. 

Setting up a compliant scheme

Implementing pension salary sacrifice requires careful attention to legal criteria. Because it involves a formal change to employment terms, seeking professional pension advice is essential to ensure your set up is both tax-efficient and fully compliant. Key considerations include:

• Minimum Wage Compliance: From April 2026, the National Living Wage rises to £12.71 per hour for those aged 21 ad over. Employers must ensure that a salary reduction does not take an employees’s salary below this legal level.

• Contractual Changes: Contracts must be duly amended and employees given clear information about the arrangement.

• Benefit Impact: Employees should be aware that a lower nominal salary can affect other benefits such as life assurance or mortgage borrowing capacity. 

• Auto-enrolment: Schemes must ensure employees still meet the minimum contribution requirement under auto-enrolment rules. 

Payroll and Documentation

Payroll systems require precise configuration to handle when employees receive pay rises, change working hours, or if businesses are subject to seasonal fluctuations. The scheme is flexible enough for seasonal or commission-based roles, and the salary sacrifice can be applied to variable pay elements, provided a more hands on approach is taken in the management and oversight of your payroll. 

HMRC expects proper documentation including written correspondence and signed agreements, dates and records of when arrangements were made, and evidence that employees were aware of the changes. 

Is pension salary sacrifice beneficial long-term?

Regulatory changes due in April 2029, will introduce a £2,000 annual cap on the NI relief for salary sacrifice contributions. Beyond this limit, both the employer and employee will be liable for NI at their standard rates. While this will limit savings for very high level contributors, the scheme remains an effective tool for the majority of the workforce whose annual contributions fall under the cap.  

Given the minimum wage rate increases taking effect in April 2026, now is the time for businesses to review their pension arrangements. Remember that, a properly structured regime is not exclusively a tax-saving mechanism; it is one aspect of an increasingly compelling employment package. For Doncaster SMEs finding it hard to attract and retain talent, this can be a competitive advantage.

Artemis Marketing provides business advice and marketing solutions to SMEs across Doncaster and South Yorkshire. This article is for general guidance only and does not constitute financial or legal advice. Businesses should consult qualified professionals before implementing pension salary sacrifice arrangements.