We often see start-ups begin with the easiest-to-administer pension scheme, typically using a default setup to tick the compliance box. While this gets things moving quickly, as your company grows and as employee earnings increase you and your employees could be missing out on thousands in tax savings each year.
Whether you’re a founder, director, or finance lead, it’s worth revisiting your pension scheme’s structure. The method used to make contributions whether it be Relief at Source (RAS), Net Pay Arrangement (NPA) or Salary Sacrifice can significantly impact your team’s take-home pay and your company’s tax efficiency. We consider these pension types below.
Relief at Source (RAS) – How it works:
With RAS, employee contributions are taken from net pay (after tax). Your pension provider then claims 20% basic rate tax relief from HMRC and adds it to the pension pot.
Example:
- Employee contributes £80 from take-home pay.
- Pension provider adds £20.
- £100 is invested in the pension.
Limitations for growing teams:
- Higher earners must reclaim additional tax relief via Self Assessment.
- Employers get no National Insurance savings on contributions made via RAS.
RAS is a good starting point but tends to be the least efficient as income levels rise.
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Net Pay Arrangement (NPA) – How it works:
With NPA, contributions are taken before income tax is applied, directly from gross salary. This lowers taxable income and automatically applies tax relief at the employee’s highest marginal rate.
Example:
- Gross salary: £4,000/month.
- Pension contribution: £400.
- Tax is calculated on £3,600.
Why this works better as income grows:
- Employees receive full tax relief automatically so there is no need to reclaim anything.
- Still no NI savings for either employee or employer.
NPA works well for higher-rate taxpayers and tends to scale better than RAS in larger teams.
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Salary Sacrifice: The Smart Play for Scaleups – How it works:
Salary sacrifice can be a win-win mechanism. Employees agree to reduce their salary by a chosen amount, and the employer contributes that amount to the pension. The key advantage? It reduces both taxable income and National Insurance Contributions (NICs) ****for the employee and the company.
Example:
- Employee earns £110,000.
- They sacrifice £10,000 into their pension.
- Their new taxable salary is £100,000.
Not only do they:
- Save 40% tax (£4,000),
- Save 2% NI (~£200),
- But they also regain their full £12,570 personal allowance, saving another £2,000+ in tax.
That’s a total personal benefit of over £6,000, without costing the company more.
And the employer?
- Saves 15% NI on the sacrificed salary
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Why It’s Time to Review Your Scheme
As your company scales, so do the opportunities to run your finances more efficiently. If you’re still using RAS or a legacy scheme default, you’re likely leaving money on the table, for both the business and your team.
Salary sacrifice offers:
- Simpler administration once set up
- Higher take-home pay potential for employees
- Lower employer NIC bills
- A more attractive benefits package to retain top talent
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Quick Scheme Comparison
| Feature | Relief at Source (RAS) | Net Pay Arrangement (NPA) | Salary Sacrifice |
|---|---|---|---|
| Contribution from | Net pay | Gross pay | Reduced gross salary |
| Tax relief method | 20% basic rate at source | Full tax relief | Full tax and NI relief |
| National Insurance savings | No | No | Yes (employer + employee) |
| Best for | Small teams, low earners | Mid/high earners | Scaleups and tax planning |
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Final Thought: Don’t Let Admin Dictate Strategy
It’s easy to stick with what was set up on day one. But what served your business when you were just getting started may now be costing you in missed tax efficiency.
Switching to a more strategic pension model, especially one using salary sacrifice, can deliver real gains to both the company and its employees.
If you’d like to review your current pension setup or assess the benefit of switching to salary sacrifice, we’re happy to help.
