Why more family businesses are turning to salary sacrifice

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 modern reward packages.

Armstrong Watson's latest Family Business Survey highlights this growing trend. Almost half (49%) of employers who responded said they currently operate salary sacrifice arrangements, compared to 31% in 2025. A further 11% are considering introducing these schemes, demonstrating that many businesses see value in offering benefits that go beyond direct pay.

What is salary sacrifice?

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 rules vary depending on the benefit being offered, so its important to seek advice before introducing a scheme.

Pension salary sacrifice remains attractive

The most common salary sacrifice 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 by way of capping the amount of pension contribution eligible for the NIC saving at £2,000.

That said, pension salary sacrifice is unlikely to disappear altogether. Many employees, especially those who are basic rate taxpayers, will continue to benefit from salary sacrifice even when the planned restrictions take effect. Businesses should also consider the wider advantages of implementing this salary sacrifice arrangement, such as long-term retirement saving and improving pension engagement as part of a broader, tax-efficient reward strategy.

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.

Supporting attraction and retention

While salary remains important, employees increasingly assess the overall value of their employment package rather than focusing solely on headline pay.

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. Ensure arrangements are properly documented, communicated clearly to employees and administered correctly through payroll.

Employers should also take care to monitor National Minimum Wage (NMW) compliance. Salary sacrifice arrangements reduce an employee's contractual cash pay and, if not managed correctly, can result in earnings falling below the applicable NMW rate. This is a common area where businesses can inadvertently fall foul of the rules, particularly where lower-paid employees participate in schemes such as pension salary sacrifice or cycle-to-work arrangements.

It is also important to consider the impact on statutory payments, pension calculations and any salary-linked benefits. Regular reviews will ensure schemes remain compliant and continue to deliver value for both the business and employees.

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.