To help you visualise how salary sacrifice works we've put together two example case studies which compares before and after Salary Sacrifice savings:
Case Study 1 – Pension Salary Sacrifice for a Small Business:
”Smith & Co” has 10 employees earning £35,000 each.
Going into 2025–26, the employer NIC rise from 13.8% to 15% will increase their NIC costs significantly – roughly an extra £920 per employee per year, or £9,200 total (assuming each employee’s salary above £5k is fully NIC-able).
Smith & Co decides to introduce a salary sacrifice pension scheme where they contribute 5% of each employee’s salary to pensions, reducing gross pay accordingly.
Each employee sacrifices £1,750, bringing their official salary down to £33,250.
The Result:
Smith & Co’s NIC bill drops by about £2,625 compared to if they had paid the full salaries (that’s 15% of the total sacrificed amount, saving ~30% of the NIC hike).
The employees each save around £140 in NIC themselves (8% of £1,750) – their take-home pay is slightly higher than it would have been without sacrifice, and £1,750 goes into each pension.
This move doesn’t eliminate the NIC increase entirely, but it offsets nearly a third of the extra cost for the company while boosting employees’ benefits.
Smith & Co also decides to use part of their employer NIC savings to cover the small admin cost of setting up the scheme and contribute a bit extra to each employee’s pension as a thank-you. A win-win outcome: the business protects its margins and the team is happier with more in their pension pots.
Case Study 2 – Electric Car vs. No Electric Car (Employee Perspective):
Jane earns £50,000 at Acme Ltd and is considering a new electric car costing £500 per month to lease.
Without any salary sacrifice, she would pay that £500 from her net salary.
Roughly speaking, she’d have to earn about £800 in gross salary to have £500 net (after 20% tax and 8% NIC).
That £800/month (or £9,600/year) would cost Acme Ltd an additional £1,440 in employer NIC (15%).
Instead, Acme Ltd offers an EV salary sacrifice scheme.
Jane sacrifices £6,000 of salary per year (£500/month) to cover the lease of a mid-range EV. Her new gross salary is £44,000.
The Result:
This saves Acme Ltd £900 in NIC (15% of £6k) on her reduced salary, though Acme will pay ~£180 in Class 1A NIC on the EV’s benefit value.
Net saving for Acme: ~£720 for the year. Jane’s taxable salary is now lower, saving her £1,200 in income tax and £480 in NIC (on £6k sacrificed).
She does incur a company car tax charge – say the EV’s BiK is £1,500, she pays 20% of that (~£300) in tax. Even after that, Jane comes out about £1,380 ahead for the year versus the scenario of taking full salary and leasing a car herself.
In effect, by using salary sacrifice she’s getting the same car for significantly less cost, and Acme Ltd has also trimmed its NIC bill. Jane is thrilled to be driving a new electric car and the company is happy to have provided a benefit at a net savings to their costs.
(Numbers simplified for illustration; actual figures would depend on the car’s list price, BiK % and the employee’s tax situation. But as you can see, the general outcome is substantial savings and mitigated NIC for the employer.)
Our Tips and Best Practices for Implementing Salary Sacrifice
Setting up a salary sacrifice scheme requires a bit of planning. Here are 3 key tips to ensure it’s done compliantly and effectively:
- Don’t Bust the Minimum Wage: This is the golden rule. You cannot reduce an employee’s cash pay below the National Minimum Wage (NMW) with a salary sacrifice. HMRC is crystal clear on this. Check every participating employee’s post-sacrifice hourly rate against current NMW rates. For reference, from April 2025 the NMW (National Living Wage) for age 21+ is £12.21 per hour. Put safeguards in place – your payroll system should cap any sacrifice to keep salary >= NMW. This is non-negotiable; breaching NMW can lead to penalties and back-pay orders. So, for example, your lower-paid or part-time staff might only be able to sacrifice a small amount if at all.
- Get Employee Agreement in Writing: Implementing salary sacrifice means changing the employment contract for each participating worker. Have employees sign a simple agreement or contract addendum that outlines the new salary and the benefit they’re receiving in exchange. Make sure they understand and agree voluntarily. You cannot force anyone into a salary sacrifice – it should be an optional benefit. Also, employees generally can opt out in the future or if their circumstances change, but usually only at certain points (e.g. end of the year or benefit period) to avoid constant fluctuations. Keep documentation for your records (it will also be needed if HMRC ever inquires).
- Communicate Clearly (No Surprises): Roll out some internal comms or one-on-one chats to explain how the scheme works. Show employees illustrative calculations of their take-home pay before and after, so they’re not anxious. Emphasise the positives: higher net pay (in pension sacrifice cases), tax savings, and the benefit itself (like the bike or car or boosted pension). Also explain any impacts – for example, that their contractual salary is lower for things like mortgage references or life insurance that is multiple of salary, etc. When people understand the trade-off, they are usually on board, but good communication is key.
- Check Impact on Other Benefits/Entitlements: A sacrificed salary is lower for many official calculations. Be mindful of things like: Statutory payments – e.g. Statutory Maternity Pay, paternity pay, sick pay – these are based on average earnings over a period. If an employee is sacrificing during that period, it could reduce their eligibility or the amount of SMP etc. One rule: if post-sacrifice earnings fall below the Lower Earnings Limit (LEL) (£123 per week in 2024–25, slightly higher in 2025–26), they could lose entitlement to statutory pay. You might advise anyone planning for a family or similar to think carefully; some employers temporarily suspend sacrifice during such periods to avoid issues. Pension scheme rules – Ensure your pension provider is on board. Most will allow salary sacrifice and often use the notional pre-sacrifice salary to calculate employer contributions so that employees aren’t disadvantaged (for example, continuing to base contributions on the original salary, or the employer making up the difference). State Pension and benefits – If someone sacrifices so much that they pay less or no NI, could it affect their State Pension or contributory benefits record? Technically, if their earnings drop below the LEL, they stop accruing NI credits . This is usually only a concern for very low earners; just be aware and maybe caution employees not to over-do sacrifice if it would consistently put them below LEL. Other workplace benefits – If you have things like life insurance that’s a multiple of salary or profit-sharing based on salary, decide whether to use notional (pre-sacrifice) salary to keep it fair. Most companies do, to avoid unintended consequences.
- Payroll and Admin: Loop in your payroll provider or software. Most modern payroll systems handle salary sacrifice easily, but you’ll need to set up the deductions and new pay elements correctly (e.g. mark the salary sacrifice so it’s excluded from tax/NIC calc). If you’re doing a pension sacrifice, create a new category of employer contribution and stop the equivalent employee contribution. Providers like The People’s Pension recommend setting up a separate “worker group” for salary sacrifice in their system so contributions are recorded as employer contributions . Little setup steps like this are important for smooth operation.
- Trial Run and Review: Consider running a pilot with a small group or even just doing the calculation for one payroll cycle to double-check everything. It’s easier to iron out kinks (like an accidental underpayment or a rounding issue) on a small scale. Also, review the uptake and feedback. Maybe more people will join once word spreads that “Hey, my take-home went up when I joined the pension sacrifice scheme!” Encourage those who benefit to share their experience (informally).
- Keep an Eye on Changes: Tax rates, NI thresholds, and NMW rates typically change annually. For instance, if NMW goes up significantly next year, a sacrifice amount that was fine this year might breach it next year. Assign someone (HR or payroll) to review salary sacrifice arrangements at least each April to ensure continued compliance. Also, budget for the fact that if NIC rates ever go down (one can dream!), the savings from sacrifice would adjust accordingly. As of now, thresholds are frozen till 2028, but things can change with new budgets.
- Seek Professional Advice if Unsure: Salary sacrifice is well-trodden ground, but if you’re implementing it for the first time, don’t hesitate to consult with a payroll specialist or accountant. They can ensure you’ve covered all bases, from the proper wording in contracts to HMRC reporting. Usually it’s straightforward – for example, HMRC doesn’t need a formal approval for your scheme, but you do report benefits like company cars on P11D or through PAYE as normal. Getting advice upfront can prevent any costly mistakes later (and it’s often a quick one-off consultation).
Lastly, remember that you don’t have to do everything at once. You might start with introducing pension salary sacrifice (since it’s easiest and yields guaranteed savings), then later add a cycle to work scheme or explore electric car offerings. Each company is different; pick the options that align with your workforce’s needs and your business goals.
