SMART Pensions – how they work

SMART Pensions – how they work

An overview of why using salary sacrifice as a mechanism for making pension contributions (referred to as “SMART pensions”) has never been more advantageous.

In these difficult economic times many employees are considering curbing their pension contributions to help make ends meet. If your organisation isn’t using SMART pensions, then now is the time to consider this as a way to help your employees maintain their pension contributions, or even increase them at no cost to them or your organisation.  

So, what are SMART Pensions?

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

Back in the 2017/18 tax year we saw the introduction of legislation to restrict the benefits obtained through salary sacrifice schemes, via the Optional Remuneration legislation. But at that time, recognising the importance of SMART pensions, the Government specifically excluded them from this change to the legislation. By excluding SMART Pensions, the Government acknowledged the importance of enabling employees to save for their retirement in a way that delivers NIC reductions – pension contributions are already tax-efficient.

What savings can be achieved?

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

The table below shows estimated combined totals for employer and employee NIC reductions possible for the 2023/24 tax year, 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
















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

  • Employers - If liable to pay the Apprenticeship Levy, SMART pensions reduces the paybill on which the Levy is calculated.
  • 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 those 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 does it 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.

As employer pension contributions are both income tax and NIC-efficient while employees’ contributions are only income tax-efficient, exchanging salary for an increased employer pension contribution in this way ensures that the whole pension contribution is NIC-efficient. In addition, there is an employer NIC reduction because of the salary sacrificed. Therefore, both employer and employee make 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 will an employer need to consider?

Salary sacrifice is a simple concept but careful implementation is the key to avoiding the pitfalls which could render the arrangements ineffective and 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.

In advance of implementing a SMART pensions scheme, communicating the benefits at the early stages is vital to 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.

Your next steps

For help and advice please speak to your usual BDO adviser or contact Shawn Healy.