Salary sacrifice is one of the most powerful — and most underused — tools in the UK employer toolkit. Used correctly, it reduces both employer and employee NI contributions simultaneously, without anyone taking home less money (in real terms).
Yet most small businesses have never set it up. Here's why you should.
What is salary sacrifice?
Salary sacrifice is an arrangement where an employee agrees to give up part of their gross salary in exchange for a non-cash benefit — most commonly pension contributions, cycle-to-work schemes, electric car leases, or childcare vouchers.
Because the employee's taxable pay is reduced, both the employee and employer pay less National Insurance on that amount.
It's HMRC-approved, widely used, and completely legal.
How the maths works
Say an employee earns £40,000 and agrees to a £3,000 salary sacrifice for their pension (so they take home based on a £37,000 salary, but their pension still receives £3,000).
| Gross salary | £40,000 | £37,000 |
|---|---|---|
| Employer NI (13.8%) | £4,261 | £3,847 |
| **Employer NI saving** | — | **£414/year** |
The employee also saves employee NI (12% or 2%) on the sacrificed amount.
Across a team of 20 employees with average £35,000 salaries:
- Participation rate of 30% → ~6 employees
- Average sacrifice of £2,500/year
- Employer NI saving: ~£2,070/year
Push participation to 60%+ and the savings double.
What can be salary sacrificed?
HMRC approves salary sacrifice for:
- Pension contributions — the most common. Reduces employer and employee NI on every penny sacrificed.
- Cycle to work — employees get a bike and accessories tax-free, up to £1,000 (or up to £2,500 for e-bikes).
- Electric vehicles — company car schemes with very low benefit-in-kind tax rates (2–5% for pure EVs).
- Childcare — employer-supported childcare, now mainly through Tax-Free Childcare accounts.
- Ultra-low emission vehicle charging — workplace charging points are a HMRC-approved benefit.
What salary sacrifice is NOT
Salary sacrifice doesn't reduce pay below the National Minimum Wage. And it must be a genuine, documented arrangement — not a cash supplement dressed up as a benefit.
The employee must genuinely give up salary in exchange for the benefit, and this must be agreed before the salary is paid (not retrospectively).
Setting it up
The basic steps:
- Choose your benefits — start with pension, as it's the simplest
- Update employment contracts — salary sacrifice requires a formal contractual change
- Set up payroll correctly — your payroll software must process the reduced gross correctly
- Communicate to employees — make sure they understand the NI saving benefits them too
The NI saving opportunity most businesses are missing
Paply's People Cost Calculator estimates the NI savings opportunity for your specific business based on headcount, average salary, and industry. For a typical 20-person UK SME, it's often £6,000–£10,000 per year — money that currently goes to HMRC unnecessarily.
The People Cost Calculator will show you your number.