Salary sacrifice for pension through my limited company — how does it work?

You've got the basic idea right. Salary sacrifice is a formal agreement — a variation of your employment contract — where you give up part of your cash salary and the company pays that amount into your pension instead.

The tax mechanics are why pensions are the classic use case: pension contributions are one of the few benefits that keep their full tax and NIC exemption under salary sacrifice. So if you sacrifice £500 of salary, the company pays £500 into your pension with no Income Tax or employee NIC on it. The company also saves the full employer NIC on the sacrificed amount — yes, really — which is why salary sacrifice usually beats paying pension contributions out of already-taxed salary.

Setting it up properly:

1. Put the arrangement in writing — amend your employment contract or director's service agreement before the sacrifice starts. It can't be backdated.

2. The reduced cash salary must not fall below National Minimum Wage.

3. Run it through payroll and report it correctly; your payroll software should have a salary sacrifice option.

Watch-outs: your 'salary' on paper is lower, which can affect mortgage applications and earnings-linked benefits. And keep total pension contributions within the £60,000 annual allowance or you'll face a tax charge. For a director it's usually very worthwhile — just get the paperwork right.