SMART Pensions – how they work

Although changes were announced in the 2025 Budget to salary sacrifice for pension contributions, they are not due to have effect until April 2029.

In the meantime, using salary sacrifice as a mechanism for making pension contributions (referred to as “SMART pensions”) remains advantageous while employer's NIC sits at 15%.

If your organisation isn’t already using SMART pensions, then now is the time to consider it as a way to help your employees maintain their pension contributions, or even increase them at no cost to them or your organisation. This is an opportunity to be perceived as a caring employer while at the same time managing costs and ensuring that your benefits package is fit for purpose.

What are SMART Pensions?

SMART pensions are a way to reduce employment costs for employers, while maintaining or enhancing employees’ pension benefits using salary sacrifice.

What savings can be achieved?

This depends on several factors, particularly the number of participating employees, the average earnings level and the amount of employee pension contributions.

The table below shows the estimated combined employer and employee NIC reductions possible for the 2025/26 and 2026/27 tax years. This helps to mitigate some of the increase in employment costs from April 2025, assuming an employee makes a 5% pension contribution and exchanges current salary in favour of additional employer pension contributions.

Average salary	Number of employees and total combined annual NIC reductions
Average salary	500	1,000	1,500
£25,000	£143,750	£287,500	£431,250
£35,000	£201,250	£402,500	£603,750
£50,000	£287,500	£575,000	£862,500

In addition to the reduction in NIC, further cost reductions are available:

For employers - If liable to pay the Apprenticeship Levy, SMART pensions reduces the paybill on which the Levy is calculated.
For employees - Under pension arrangements that are not “SMART”, income tax relief is claimed by the pension scheme administrator, but only at the basic rate of income tax (20%). For individuals liable at the higher (40%) or additional (45%) rate income tax, (broadly those earning over £50,000 and £125,000) relief is claimed by employees via their personal tax return. This is often overlooked by employees, resulting in them missing out on the full amount of income tax relief available.

How do SMART pensions work?

Employee contributions are replaced by enhanced employer contributions. At the same time, the employees agree to a reduction in annual salary equal to the value of the enhanced employer contributions.

Because employer pension contributions are both income tax and NIC-efficient, but employees’ contributions are only income tax-efficient, exchanging salary for an increased employer pension contribution makes sure that the whole pension contribution is NIC-efficient. Employers also get an NIC reduction because of the salary sacrifice, so both employer and employee reduce their NIC costs.

SMART pensions are fully compatible with auto-enrolment and can be implemented as a standalone arrangement or as part of a wider flexible benefits offering.

What do employers need to consider?

Salary sacrifice is a simple concept, but careful implementation is the key to successfully realising cost reductions.

For example, the potential impact of the National Minimum Wage rules will need to be considered to ensure your organisation remains compliant. So if we take an individual earning £25,000 and contributing the minimum 5% required by auto enrolment into a workplace pension, if that is done via salary sacrifice to save NIC (which the employer might use to top up the contributions for the employee) then that leaves just £618 headroom for other deductions before they are earning less than minimum wage.

For those earning more and making full use of a generous “Flex” scheme, they can be tripping below NLW thresholds very easily. Issues at £35K and £45K are not as rare as you might think. The loss of NIC savings for these employees would represent a relatively small amount, though more significant for the employer and so an employer might consider that stopping salary sacrifice over the cap (or at all for pensions given the administrative complexity) is a commercially sensible way forward.

Before implementing a SMART pensions scheme, communicating the benefits at the early stages is vital for obtaining internal stakeholder and employee buy-in.

Our team has extensive experience in implementing SMART pensions. We work with employment lawyers and pension advisers to address all relevant issues from design and documentation to agreeing the tax and NIC impacts with HMRC and even employee communication. If you’d like to discuss setting up a SMART pension scheme, get in touch and we will be happy to help.

What’s changing following the 2025 Budget

In the 2025 Budget the Government restricted the ability for employees and employers to reduce their NIC through pension salary sacrifice arrangements.

With effect from April 2029, pension contributions that are made using a salary sacrifice arrangement will be liable to NIC above £2,000.

For employees and employers contributing only at the statutory levels under pensions auto-enrolment, the impact will be limited because contributions are calculated with reference to qualifying earnings, meaning that only employees earning between £46,240 and £50,270 will be impacted.

Employees contributing more than the statutory amounts will see savings reduced as they and their employer will pay NIC on any amount in excess of £2,000. The employee rate will be 8% for earnings below £50,270 (or 2% for earnings above), and an employer rate of 15% of the amount sacrificed in excess of £2,000.

There will be no impact on any existing employer contributions that are not subject to a salary sacrifice, nor will there be any income tax impact on the amount sacrificed.

The measure has been delayed to allow businesses time to review their arrangements and make the necessary adjustments to payroll, as well as consult and communicate with employees.

Questions employers should be asking themselves ahead of the 2029 changes

What are the NIC savings we currently achieve through our Flex structure?
What is the impact of the loss of these savings on the commerciality of our Flex package?
What is the profile of our workforce – who will be affected by the cap and how? Do we want to help them and be seen as a caring employer?
Do we fully understand how our Flex plan impacts on those at or near the National Minimum Wage?
Do we know how our payroll package will deal with mandatory payrolling benefits in kind where some or all are offered via Flex?
Is there scope to increase basic pension contributions (ie outside salary sacrifice schemes) in 2029/30 to make the total remuneration package more NIC-efficient?
If we do want to revisit the structure of our benefits package, do we know which of the benefits we offer are most valued by our employees and new hires?
If we are facing cost constraints, are we considering tax-efficient benefits that are also at minimal cash cost to the business? For example, Enterprise Management Incentives will be available to a far wider group of businesses following Budget changes. Are we making best use of such equity investments?
Can we and our employees make more use of the current rules before they are abolished?
How are we going to communicate and educate employees through this transition?

The key message is that you as an employer need to have thought through all the above well in advance of the benefits year which contains 6 April 2029 so that you are ready for the changes. Starting this process sooner rather than later will give you enough time to model the changes as well as to consider your culture, values and offerings and the commercial constraints that bind your decisions.

Your next steps

If you are an employer and you need advice on SMART pensions, get in touch with your usual BDO adviser or contact Shawn Healy.

The full version of our article considering the Budget changes was first published in Tax Weekly.