Does Salary Sacrifice Affect Pensions?

Salary sacrifice schemes are growing in popularity – particularly those that let employees drive brand-new electric cars for less.

While tax savings and zero-emission perks are often front and centre, many employees (and employers) have a more practical question: Does salary sacrifice affect pensions?

The short answer? Yes, it can – but not always in a negative way. The longer answer depends on how your pension is structured, how your employer manages contributions, and what kind of scheme you’re in.

What Is Salary Sacrifice? (Quick Refresher)

Salary sacrifice is a government-approved arrangement where an employee gives up part of their gross salary in exchange for a non-cash benefit. That might be additional pension contributions, a cycle-to-work scheme, or – as is increasingly common – a fully electric car.

Because the deduction comes from gross salary, before tax and National Insurance are applied, employees pay less tax and less National Insurance.

When it comes to electric car salary sacrifice, the result is that employees can drive a brand-new EV for significantly less than they’d pay via a personal lease – often saving 30–60% overall.

How Salary Sacrifice Affects Pensions

This is where it gets slightly more complex. By reducing your gross salary, salary sacrifice can, in some cases, also reduce:

• The amount of money you contribute to your pension
• The amount your employer contributes, depending on the scheme rules

That said, most responsible employers put safeguards in place to make sure your pension contributions are protected.

Types of Pension Contributions

There are two main types of pension contributions to be aware of:

1. Percentage-Based Contributions

Most workplace pensions calculate contributions as a percentage of your gross salary. For example:

• You contribute 5% of salary
• Your employer contributes 3%

If your gross salary drops because of salary sacrifice, and the contributions are tied to that reduced salary, your pension contributions could be slightly lower.

2. Reference or Notional Salary Contributions

Many employers now calculate pension contributions based on your pre-sacrifice salary (also known as “reference salary” or “notional salary”). This ensures your pension contributions remain the same, even if you opt into a salary sacrifice scheme.

This is often referred to as “salary sacrifice with pension protection” and is considered best practice, especially for large employers.

Do All Employers Protect Pension Contributions?

Not automatically. While many employers do protect pensions within salary sacrifice arrangements, it’s not a legal requirement unless specified in the contract or policy.

Employees should:

• Check their employment contract or HR policies
• Ask HR or payroll whether pensions are based on actual or notional salary
• Get written confirmation before signing up to a scheme

At EZOO, we recommend that businesses offering salary sacrifice schemes work with providers (like us) who understand these nuances and can help employers build a fully compliant and employee-friendly policy.

Other Benefits That May Be Affected

Because salary sacrifice reduces your official gross salary, it can also influence:

• Death in service benefits
• Redundancy calculations
• Mortgage or loan applications
• State benefits eligibility

However, again, many employers use reference salary to assess other benefits, mitigating any impact.

The best practice? Treat salary sacrifice as a total rewards strategy, not just a one-off benefit. Consider how it aligns with your broader employee benefits package, including pension, insurance, bonus schemes, and more.

Why Salary Sacrifice Is Still a No-Brainer for EVs

Even with a potential reduction in pension contributions (which can be avoided with good scheme design), salary sacrifice remains one of the most tax-efficient ways to drive. Why?

• You save on income tax and National Insurance
• Your employer often shares their NI savings with you
• You avoid big upfront costs associated with leasing or buying
• You pay low benefit-in-kind tax (just 3% in 2025/26 for BEVs)
• You drive a brand-new EV without the hassle of insurance, servicing, or depreciation worries

With the cost-of-living still high and more people thinking long-term about both money and the planet, EV salary sacrifice is a smart way to do both.

Tips for Employers Offering Salary Sacrifice Schemes

• Communicate clearly with staff about how pensions and benefits are affected
• Use notional salary as the basis for pension and death-in-service benefits where possible
• Offer guidance or bring in a benefits provider who can explain the full package
• Partner with providers who offer flexible, compliant solutions with minimal admin

Salary sacrifice should never leave employees worse off in the long run – when managed well, it becomes a powerful, future-forward part of your employee value proposition.

Keep Your Pension On Track

So, does salary sacrifice affect pensions? Technically, yes – it can reduce pension contributions if based on the post-sacrifice salary. But in reality, most employers either protect pensions using notional salary or can easily set up schemes that do.

The key takeaway? Salary sacrifice doesn’t have to come at the cost of your retirement savings. With the right setup, you can drive a new electric car, cut your tax bill, and keep your pension on track – all at the same time.

Frequently Asked Questions