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  • Last updated 17 June 2024

Salary sacrifice pensions

What is Salary Sacrifice?

Salary Sacrifice is a government-backed scheme to help employers and their employees save National Insurance by paying into a pension.

Here, an employee effectively 'swaps' part of their salary for another benefit, in this case, pension contributions.

The employee agrees to give up a small part of their gross earnings, reducing their overall taxable salary. These 'sacrificed' earnings are then added directly into their workplace pension as employer pension contributions.

Today only 41% of smaller commercial employers offer Salary Sacrifice with almost no Domestic Employers offering the scheme.  Following strong feedback from clients wishing to make these savings, NannyPaye is proud to be the first nanny payroll provider to offer this option to our clients.  It's a simple way to reduce your tax bill while also helping your nanny keep more of what they earn.  

How it works

When an employee agrees to take part in a Salary Sacrifice scheme, they essentially agree to use a small part of their pre tax gross pay to fund their pension rather than their post tax net pay. 

Rather than paying a part of their net earnings into their pension every month, they get paid less gross on the agreement that any money they sacrifice you pay straight into their pension instead as additional employer contributions.

The benefit of doing this is that by reducing the gross taxable salary, they owe less National Insurance and get to keep more of what they earn overall, whilst not reducing their overall pension contribution.

Here’s an example of Salary Sacrifice in action.

Rachel works for a family and earns £50,000 a year.

Before Salary Sacrifice, she paid 5% of her earnings into her workplace pension, with her employer adding a further 3% - that works out as £4,000 a year. After her pension contributions and tax deductions, her net annual pay was £36,025.92

However, with Salary Sacrifice, Rachel could be keeping more of what she earns. After joining the scheme she now on paper she earns £47,500 a year gross - as she’s “sacrificed” the 5% of her salary that she was previously adding to her pension. This contribution now comes entirely from her employer.

This leaves her overall with an extra £300.00 a year due to her NIC savings.

She’s still adding £4,000 to her pension every year, but by reducing her salary, she’s trimmed her tax bill, meaning she keeps hold of more of her money.

How does the employer/family save money?

Because Salary Sacrifice reduces an employee's earnings, you’re also reducing the amount of Employer National Insurance the family owes.

National Insurance is calculated on gross taxable salary - before any deductions. Reducing an employee’s ‘on paper’ salary means you’ll owe less in employer National Insurance contributions.

Using Rachel’s example, rather than paying National Insurance on £50,000 a year, you’re now taxed on £47,500 a year & you’ve just saved your family £345.00 a year simply by switching schemes. 

Savings illustrated by Gross pay

Weekly Gross

Monthly Gross

Employer Annual Saving

Employee Annual Saving









































Important things to keep in mind

While Salary Sacrifice can be a fantastic way to effectively decrease your costs and increase your employee's net pay, it will have an impact on anything that is linked to an employee’s salary.

Here are a few things that may affect your employee's decision to switch to a Salary Sacrifice scheme.

Low Income

For daily (non live-in) employees you won’t be able to use Salary Sacrifice where it would reduce an employee’s earnings under minimum wage.

Salary-Based Benefits

Any life insurance or loan/mortgage applications that are linked to salary may also be affected. Typically you can provide a lender with a letter/statement explaining that your employee is part of a Salary Sacrifice arrangement - but it might be worth double checking if your employee is planning on applying for a loan/mortgage.

Maternity Pay

Typically Statutory Maternity Pay and other income related allowances are calculated based on average taxable weekly earnings so could be reduced if your overall salary is reduced.

What happens next?

NannyPaye is not able to advise you or your nanny if Salary Sacrifice is the best option for either of you. For the avoidance of doubt we recommend that you consult with a qualified and regulated pensions advisor before making any decisions.

We are able to illustrate the tax savings you and your Nanny will make and based on that, and alongside any further advice you seek, you may wish to move to offering a Salary Sacrifice pension to your Nanny.

If you do choose to offer a salary sacrifice scheme, simply pay the enhanced fee of £100.00 per annum when renewing our pensions service (rather than the standard £60) and we will then action the following:

1. Check that the employer saving alone saves you more than the increase in fee for the enhanced pension service. If you are paying your employee over £206 a week gross this will be the case, but you can use our Tax Calculator to check this.

2. Check that the scheme does not drop your employees pay below the National Minimum Wage.

3. Move your payroll onto a gross basis should you have a net agreement with your employee.

4. E-mail to you a letter and information for you to provide to your Nanny so they can make an informed choice (as well as seeking their own guidance).

5. E-mail to you a letter to pass to your employee requesting permission to 'Sacrifice' some of the salary and illustrating the new taxable pay.

6. E-mail to you a letter for your employee to sign and pass to you confirming their agreement to the new salary.

7. Contact Nest to make the appropriate changes.


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