Check your last payslip and you'll see two deductions eating into your pay before your pension contribution is even worked out — and since April 2025, one of those deductions has cost your employer considerably more than it used to. Employer National Insurance rose from 13.8% to 15%, and the threshold at which it starts to apply dropped from £9,100 to £5,000 a year. For most people that reads like an accounting footnote buried in a Budget document. For anyone paying into a workplace pension, it's the reason salary sacrifice deserves a proper look this year rather than a vague good idea filed under "someday".
What actually changed for employers
Take an employer paying someone £35,000 a year. Before April 2025, employer NI was due on everything above £9,100, so roughly £25,900 of that salary attracted the 13.8% charge — about £3,574 a year. Under the new rules, NI is due on everything above £5,000, at 15%, which works out at £4,500 on the same salary. That's an extra £926 per employee, and multiply that across a workforce of even fifty people and you're looking at tens of thousands of pounds that wasn't there twelve months earlier. Plenty of employers responded by trimming discretionary perks. A growing number responded by pushing salary sacrifice pension schemes harder instead, because sacrificed pay never counts as salary in the first place — no employer NI, no employee NI, no income tax on that portion.
How salary sacrifice actually works
You agree with your employer to give up a slice of your gross salary — say £150 a month — and in exchange your employer pays that £150 straight into your pension as an employer contribution, on top of whatever they were contributing already. On paper your salary drops by £150 a month. In practice you don't lose £150 of take-home pay, because that £150 was never going to reach your bank account fully intact anyway: it would have had income tax and employee National Insurance taken off it first. Route it through salary sacrifice instead and none of those deductions apply, because HMRC treats sacrificed pay as if you never earned it. Compare that with a standard "relief at source" pension contribution, where you pay in from your net salary and the pension provider claims back basic-rate tax — salary sacrifice additionally saves the National Insurance that a normal contribution never recovers.
The numbers, worked through
Take a basic-rate taxpayer on £35,000 who wants to put an extra £2,000 a year into their pension. Contributing via net pay or relief-at-source, they'd lose 8% employee NI regardless (National Insurance is charged on gross pay before any pension relief kicks in through those routes), so that £2,000 has already cost them the NI hit — around £160 — with no way to claw it back. Route the same £2,000 through salary sacrifice instead and that £160 stays in their pocket, because the salary was reduced before NI was ever calculated. Add the employer's side: 15% employer NI on £2,000 is £300 that the employer no longer has to pay HMRC. Some pension providers — Aviva, Scottish Widows, Nest and the People's Pension all run schemes like this — structure the deal so the employer passes some or all of that £300 straight into the employee's pension pot as well, rather than quietly pocketing it.
Where the extra saving usually ends up
This is the bit that varies enormously between employers, and it's worth chasing down directly rather than assuming the best. Some businesses pass on the full employer NI saving as an extra pension contribution. Others split it — half into the pension, half kept by the business to cover the cost of running payroll changes. A fair few keep all of it, offering staff the income tax and employee NI saving but nothing more, which is still a genuine benefit but a smaller one than the scheme is capable of. If your employer isn't passing on any part of its own saving, ask them why. Running a salary sacrifice scheme costs a business very little once it's set up in the payroll software, and keeping the entire NI windfall while advertising the scheme as an "employee benefit" is a harder position to defend now that the saving itself has grown by more than a third.
The catch nobody mentions
Salary sacrifice can quietly shrink your maternity pay.
Statutory Maternity Pay is calculated from your average weekly earnings over an eight-week reference period, and because sacrificed pay isn't counted as earnings, a large sacrifice arrangement running through that window can pull your average down and reduce what you're entitled to. The same logic applies to some mortgage affordability checks — a handful of lenders work from your post-sacrifice salary on your payslip rather than your contractual gross pay, which can make your borrowing capacity look smaller than it actually is. Neither of these is a reason to avoid salary sacrifice altogether. They're a reason to pause the arrangement, or reduce it, in the months before you apply for a mortgage or go on maternity leave, and to raise it with your mortgage broker before an application rather than after a decline.
Who can't use salary sacrifice, and why
Salary sacrifice has one hard legal limit that catches out lower earners in particular: your sacrificed pay can never take your notional hourly rate below the National Minimum Wage or National Living Wage. Payroll software is supposed to block a sacrifice arrangement automatically if it would breach this, but it's worth checking yourself if you're on or near the minimum wage and considering a large sacrifice, because the consequence of getting it wrong falls on the employer rather than the employee — HMRC can and does investigate. This is one of the few areas where the rules genuinely protect the lower-paid rather than mainly benefiting people already comfortable enough to have spare salary to give up. It also means salary sacrifice is structurally a middle and higher earners' tool, which is worth bearing in mind before assuming it's the right answer for every employee at every pay grade.
There's a second, quieter limit worth knowing about if you're planning a mortgage application in the next year or two. Some lenders calculate affordability using your contractual gross salary before sacrifice, which works in your favour. Others use the salary actually shown on your most recent payslips, which is the post-sacrifice figure — and a smaller number ask specifically for a letter from your employer confirming the pre-sacrifice figure, which not every payroll department is set up to produce quickly. Ask your mortgage broker which approach your target lender takes before you apply, not after a decision in principle comes back lower than you expected.
Net pay arrangements versus salary sacrifice: a distinction worth knowing
Not every pension scheme that reduces your taxable pay is technically salary sacrifice, and the difference matters for anyone comparing schemes across two employers. A "net pay arrangement" takes your pension contribution out of your pay before income tax is calculated, which gives higher and additional-rate taxpayers automatic full relief without needing to claim anything back — useful, but it does nothing to reduce your National Insurance liability, because NI is still calculated on your pre-contribution salary. Salary sacrifice goes a step further by reducing your contractual salary itself, which is why it saves NI as well as tax. If your employer describes their scheme simply as "pension contributions deducted before tax", ask explicitly whether it's salary sacrifice or a net pay arrangement — the tax relief can look identical on a rough payslip glance while the NI saving is completely different underneath.
If your employer doesn't offer it yet
Plenty of smaller employers still don't run a salary sacrifice scheme, usually because nobody in the finance team has got round to setting it up rather than because of any genuine objection to the idea. Setting one up isn't complicated from the employer's side — most payroll software, including the major providers used by small and medium businesses, has salary sacrifice functionality built in already, and pension providers including Nest and The People's Pension offer free guidance to employers on structuring the paperwork correctly. If you're on a workplace pension currently running as a standard net pay or relief-at-source arrangement, it's worth raising salary sacrifice directly with whoever manages payroll rather than assuming it's unavailable simply because nobody has mentioned it. Auto-enrolment minimum contributions — 8% of qualifying earnings in total, made up of at least 3% from the employer and the rest from the employee — can be restructured through salary sacrifice without changing the actual amount going into your pension at all, which makes it one of the easier changes to propose because it costs the business nothing beyond the payroll setup and saves everyone involved money on the same contribution they were making anyway.
What to check on your payslip this week
Pull up your last three payslips and find the pension contribution line. Then ask your HR system, or your payroll team directly, two specific questions: what percentage of my sacrificed salary counts as an employer National Insurance saving, and how much of that saving is added to my pension rather than retained by the business. Most payroll teams can answer within a day if the scheme is being run properly — the calculation isn't complicated, it's just rarely explained. If nobody can give you a straight answer, that tells you plenty about how carefully the scheme is actually being managed on your behalf.