Millions of workers across the UK could cut their tax bills and boost their retirement savings using a little-known pension strategy, as new National Insurance (NI) rules take effect from this month.
This tax-efficient method allows employees to give up part of their salary in exchange for their employer making pension contributions on their behalf.
The arrangement benefits both parties as employees save on income tax and National Insurance on the sacrificed portion, while employers avoid paying the 15 per cent employer NI contribution on that amount.
As of April 2025, the National Living Wage increased from £11.44 to £12.21 per hour, while the threshold at which employers must start paying NI on behalf of employees dropped from £9,100 to £5,000.
At the same time, the employer NI rate rose from 13.8 per cent to 15 per cent, increasing the cost of employment for businesses and reducing take-home pay for many workers.
But experts say a simple change in how employees contribute to their pensions — known as salary sacrifice — could soften the blow and deliver substantial savings for both employees and employers.
A simple change in how employees contribute to their pensions could see substantial savings for both employees and employers
GETTYClare Stinton, head of workplace saving analysis at Hargreaves Lansdown said: "Tax hikes can make April a difficult month but there’s a real sting in the tail for employers this year.
"The cost of having employees has just surged, thanks to a double whammy of higher wages and increased National Insurance costs.
"However, there is one proven way to soften the NI hike: salary sacrifice. The result is tax savings for both parties."
For employees, salary sacrifice can deliver tax savings between 28 and 47 per cent, depending on their income. But for higher earners, the savings can be even greater.
She said: "For those sacrificing income between £100,000 and £125,140, the effective savings soar to 62 per cent, thanks to the way tax bands operate."
Experts are warning of fiscal drag's impact on peoples' tax bill GETTY Amid rising employment costs, the figures from Hargreaves Lansdowne show how salary sacrifice could help save thousands of pounds each year.
A business employing 20 people each earning £35,000 a year would see its employer NI bill jump from £71,484 in 2024/25 to £90,000 in 2025/26, a rise of over £18,000.
By introducing a five per cent salary sacrifice scheme, it could save £5,250 in NI, while each employee would save around £140 in NI contributions themselves.
The potential benefit grows with larger workforces and higher salaries. For example, an employer with 200 employees earning £40,000 each could save £60,000 in NI through salary sacrifice — and employees could save around £160 each.
Personal finance experts say workers should ask their employer if such a scheme is available and consider increasing their pension contributions to take advantage of the NI and tax savings
GettyWhile many associate salary sacrifice with business accounting, personal finance experts say workers should ask their employer if such a scheme is available and consider increasing their pension contributions to take advantage of the NI and tax savings.
For consumers struggling with frozen tax thresholds and rising living costs, salary sacrifice offers a rare opportunity to boost retirement savings while reducing immediate tax liabilities.
Stinton concluded: "Any savings made by the employer can be reinvested back into the business or used to enhance employee pensions or wider benefits packages further.
"It could prove a very cost-effective way of boosting staff retention or way to control business costs at a difficult time.”
