With costs rising across the board, many employers are asking the same question: how do we support our team without pushing payroll even higher? This is where salary sacrifice often comes into the conversation.
With costs rising across the board, many employers are asking the same question.
How do we support our team without pushing payroll even higher?
For most growing businesses, salaries are already one of the biggest fixed costs. Increasing pay across the board is not always realistic. At the same time, doing nothing does not feel right either.
This is where salary sacrifice often comes into the conversation.
It is not new. It is not flashy. But it can be effective.
What Is Salary Sacrifice?
In simple terms, salary sacrifice is an agreement.
An employee agrees to give up part of their gross salary in exchange for a benefit. That benefit might be additional pension contributions, an electric vehicle, or a cycle-to-work scheme.
Think of it less as a pay cut and more as redirecting money before it passes through the tax system.
Instead of receiving that portion of salary and then paying tax and National Insurance on it, the employee swaps it for a benefit. Because the adjustment happens before tax and NI are calculated, both the employer and the employee can reduce National Insurance costs.
It is not about paying less. It is about structuring pay differently.
Why It Can Work So Well
Imagine you are filling a bucket with water. If there are small holes in the side, some of that water escapes before it reaches the bottom.
Tax and National Insurance are part of the system. They are necessary, but they reduce the amount that ultimately lands in someone's pocket.
Salary sacrifice works by adjusting the flow before it reaches those holes. The benefit is provided first, and the tax position adjusts accordingly.
For employers, this can mean lower employer National Insurance contributions. For employees, it can mean receiving benefits in a more tax-efficient way.
The overall cost to the business does not necessarily increase, but the perceived value to the employee often does.
What About the Autumn Budget Changes?
There was a lot of discussion following the Autumn Budget 2025 about a proposed cap on National Insurance relief for pension contributions.
That change will not take effect until April 2029.
For now, the current rules remain in place. The existing advantages of salary sacrifice arrangements, particularly around pensions, still apply.
This is important because many employers assumed the opportunity had already disappeared. It has not.
More Than Just Pensions
Salary sacrifice is often associated with pensions, but it is not limited to them.
Electric vehicle schemes, for example, have grown in popularity. They allow employees to access a car in a structured way, often with favourable tax treatment compared to funding it personally.
Cycle-to-work schemes can support wellbeing initiatives while remaining cost-efficient.
The key is that the benefit has to be something employees genuinely value. A scheme only works if it aligns with your team.
Is It Right for Every Business?
No.
Salary sacrifice is not a magic switch that reduces payroll overnight. It needs to be structured properly and communicated clearly.
It can affect statutory calculations such as maternity pay and sick pay, so it is important to understand the implications before implementing it.
But for businesses looking to offer more without simply increasing the payroll bill, it is a conversation worth having.
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Hancock & Hastings
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