Why Tech Startups Should Consider a Salary Sacrifice Pension (Pros & Cons)

Why Tech Startups Should Consider a Salary Sacrifice Pension (Pros & Cons)

For tech startups, every decision around cash, hiring, and employee benefits matters. Founders are often balancing limited budgets with the need to attract and retain great talent — all while keeping the business tax-efficient.

One option that’s increasingly popular with growing tech companies is a salary sacrifice pension scheme. Done properly, it can be a win-win for both the company and employees — but it isn’t right for everyone.

In this article, we explain what salary sacrifice pensions are, why tech startups often consider them, and the key pros and cons to be aware of.

What Is a Salary Sacrifice Pension?

A salary sacrifice pension arrangement allows an employee to agree to give up (or “sacrifice”) part of their gross salary in exchange for an increased employer pension contribution.

Instead of:

• Paying part of their salary
• Then making an employee pension contribution

The employer pays that amount directly into the pension.

The result is that both the employee and the employer can save on National Insurance contributions (NICs).

Why Salary Sacrifice Appeals to Tech Startups

Tech startups often:

• Compete for talent with larger, better-funded businesses
• Want to offer attractive benefits without large cash outlays
• Employ higher-earning staff who value tax efficiency

Salary sacrifice pensions can tick all three boxes.

The Benefits for the Company

1. Employer National Insurance Savings

When salary is sacrificed, the company no longer pays employer’s NIC (currently 13.8%) on that portion of pay.

For example:

• £5,000 sacrificed into pension
• Employer NIC saving of £690

Many startups choose to:

• Retain this saving, or
• Share some or all of it with employees via higher pension contributions

2. A Cost-Effective Employee Benefit

Salary sacrifice pensions allow startups to enhance their benefits package without increasing headline salaries.

This can be particularly attractive when:

• Cash flow is tight
• The business wants to avoid locking in higher fixed pay costs

3. Supports Recruitment and Retention

Tech talent is increasingly benefit-aware.

Offering a salary sacrifice pension can:

• Signal a well-run, mature business
• Appeal to employees thinking long-term
• Help differentiate you from early-stage competitors

The Benefits for Employees

1. National Insurance Savings

Employees don’t pay employee NICs on the salary they sacrifice.

For many employees, this means more money going into their pension at no extra cost.

2. Immediate Tax Efficiency

Because the contribution is made before tax:

• Income tax is reduced
• NICs are reduced
• Pension contributions grow tax-free

This is particularly valuable for:

• Higher-rate taxpayers
• Employees trying to maximise pension saving

The Downsides and Risks to Be Aware Of

While salary sacrifice can be very effective, there are some important considerations.

1. Impact on Statutory Payments

Because salary sacrifice reduces contractual salary, it can affect:

• Statutory maternity, paternity, and adoption pay
• Statutory sick pay
• Redundancy pay

A reduced salary may have a negative impact on those looking to secure loans or mortgages. 

2. National Minimum Wage Rules

Salary sacrifice cannot reduce an employee’s pay below the National Minimum or Living Wage.

This means it may not be suitable for:

• Lower-paid employees
• Very junior roles

3. Employee Understanding

Salary sacrifice pensions are tax-efficient, but they can be confusing at first.

Without clear explanation:

• Employees may worry about reduced salary
• Take-up may be lower than expected

Education and good onboarding make a big difference.

How On The Go Accountants Can Help

We help tech startups:

• Decide whether salary sacrifice pensions are right for them
• Set up schemes correctly and compliantly
• Model employer NIC savings
• Communicate changes clearly to employees

If you’re considering introducing a salary sacrifice pension — or want to sense-check whether it makes sense for your team — we’re happy to help.

Get in touch with our team to discuss your options.