Exclusive Guides
Join Thrive to Get Your Free Guides ⇢
Pension

Salary Sacrifice Pensions Explained: How They Work and Why They Matter

May 7, 2025

Salary sacrifice pensions are one of the smartest, most tax-efficient ways to boost your retirement savings - and they’re simpler than they sound. At Thrive, we believe in making financial wellbeing feel achievable.

Salary sacrifice pensions are one of the smartest, most tax-efficient ways to boost your retirement savings - and they’re simpler than they sound. At Thrive, we believe in making financial wellbeing feel achievable.

Here’s everything you need to know about salary sacrifice pensions: how they work, why they matter, and how you can make the most of them.

What is a Salary Sacrifice Pension?

Essentially, salary sacrifice is an agreement between you and your employer. You agree to exchange (or “sacrifice”) a portion of your gross salary. In return, your employer pays that amount directly into your workplace pension scheme.

Because your salary is technically lower, you pay less in National Insurance Contributions (NICs). Your employer saves on NICs too - and many pass some of those savings straight into your pension. It's a smarter way to grow your pension, whilst reducing your NI and potentially your income tax bill.

How Does Salary Sacrifice Work?

Here's a simple example:

  • Your gross salary: £55,000
  • You sacrifice 5% = £2,750 towards your pension
  • Your new taxable salary: £52,250

You pay less tax and National Insurance, and your pension receives the £2,750 you’ve sacrificed - plus potentially an extra boost from your employer.

Here is a more in depth look at what it means for you take home pay as well as your pension:

Outputs Before Salary Sacrifice After 5% Salary Sacrifice
Salary £55,000.00 £52,250.00
Adjusted personal allowance £12,570.00 £12,570.00
Employee income tax £8,332.00 £8,332.00
Employee NIC £3,110.60 £3,055.60
Employer NIC £6,334.20 £5,954.70
Net salary £40,807.40 £40,862.40
Total pension contribution £5,500.00 £5,879.50

To work out what salary sacrifice may look like for you, use our pension calculator available here.

What Are the Benefits of Salary Sacrifice?

1. Lower Tax and National Insurance -Reducing your salary means you pay less in NICs and, depending on your earnings, less income tax.

2. Bigger Pension Savings - More money is being paid into your pension pot, helping it grow faster without impacting your lifestyle.

3. Employer Contributions - Employers may add the NI savings they make back into your pension, giving your retirement fund an extra boost.

4. Future Financial Security - Small changes now can make a big difference later. Salary sacrifice helps build a more secure, confident future.

Benefits for Employers

Salary sacrifice isn’t just a win for employees - it offers major value for employers too.

1. Lower National Insurance Contributions

Employers save on NICs for every employee who takes part in salary sacrifice. These savings can be reinvested into the business or used to enhance employee benefits.

2. Cost-Effective Employee Benefit

Offering salary sacrifice demonstrates a commitment to employee financial wellbeing, without raising salaries. It’s a high-impact, low-cost perk that helps you stand out.

3. Recruitment and Retention

Financial wellbeing is a growing priority. Salary sacrifice helps you attract top talent and retain current staff by offering practical, meaningful support.

4. Easy to Implement

With the right partner, salary sacrifice is easy to roll out and manage. Thrive’s platform ensures compliance, handles payroll integration, and provides a clear pathway for your team.

Things to Consider

While salary sacrifice offers major benefits, there are a few things to keep in mind:

  • Lowering your salary might affect things like mortgage applications or statutory benefits.
  • You can’t sacrifice below the National Minimum Wage.

Always check how salary sacrifice affects your overall financial situation before opting in.

How Thrive Makes It Simple

At Thrive, we make setting up and managing salary sacrifice easy for both employers and employees.

Our platform:

  • Clearly explains how salary sacrifice works
  • Calculates potential savings instantly
  • Streamlines set-up with payroll integration
  • Supports ongoing management with clear tracking and updates

Whether you’re an employer wanting to offer smarter benefits or an employee ready to take control of your future, we’ll help you get started.

Ready to make salary sacrifice work for you?

Log in to Thrive today or speak to your HR team to get started.

Target Keywords

• Workplace pensions for HR directors •How to implement workplace pensions in SMEs • Employee benefits package for HR • Choosing the best workplace pension provider • Pension and benefits management for HR

Get Free Salary Sacrifice Guide

Thrive can help you implement salary sacrifice quickly and seamlessly, ensuring compliance while maximising savings. Complete Your Details to Get your Guide Today!

Find Out More ⇢