Why more family businesses are turning to salary sacrifice

By Lee Stott, employment tax partner, Armstrong Watson 

With employment costs continuing to rise, many family businesses are looking for ways to attract and retain talented employees without relying solely on salary increases.

As a result, salary sacrifice arrangements are becoming an increasingly important component of reward packages. 

Armstrong Watson’s latest Family, Privately-Owned and Owner-Managed Business Survey highlights this growing trend.

Almost half (49%) of respondents said they currently operate salary sacrifice arrangements, compared to 31% in 2025. A further 11% are considering introducing these schemes. 

Salary sacrifice allows an employee to give up part of their contractual salary in exchange for a non-cash benefit provided by their employer.

When structured correctly, these arrangements can create National Insurance Contributions (NIC) savings for both employers and employees and, in some cases, other tax efficiencies, while increasing the overall value of an employee’s remuneration package. 

The range of benefits available through salary sacrifice has changed over time, but common examples include pension contributions, electric vehicle schemes and cycle-to-work arrangements.  

The most common arrangement relates to pension contributions, where an employee agrees to reduce their salary, and the employer makes an equivalent employer pension contribution instead. 

For many years, this approach has created NIC savings for both employers and employees, making it an effective way to boost retirement savings while enhancing the overall reward package. 

However, the Government has announced plans to restrict the employee NIC advantages of pension salary sacrifice from April 2029, capping the amount of pension contribution eligible for the NIC saving at £2,000.  

Rather than viewing the proposed changes as the end of salary sacrifice, take the opportunity to understand how the rules may affect your workforce and whether adjustments to their reward strategy will be required in the future. 

A well-designed reward strategy can combine salary sacrifice with pensions, employee benefits and bonus arrangements to create a package that meets both short-term and long-term financial needs.

If your business is competing against larger organisations for talent, offering a broader range of benefits can be an effective way to stand out without significantly increasing fixed employment costs. 

Getting the details right 

As with any reward initiative, implementation is key. Arrangements should be properly documented, communicated clearly to employees and administered correctly through payroll. 

Employers should also consider National Minimum Wage compliance, as salary sacrifice arrangements can reduce contractual pay below the applicable NMW threshold if not managed carefully. 

With almost half of businesses already operating salary sacrifice arrangements and more considering their introduction, this highlights that effective reward strategies are about far more than salary alone.

For many employers, salary sacrifice remains a valuable tool for creating a competitive, sustainable and attractive remuneration package. 

If you would like advice and support around salary sacrifice arrangements, please get in touch. Call 0808 144 5575 or email help@armstrongwatson.co.uk

This article appears as part of a paid partnership with Armstrong Watson