What is salary sacrifice for pensions?

Pensions remain one of the most tax-efficient ways to save for retirement, and there are several ways to build up your pot through the workplace. One option you may have heard of is salary sacrifice, which allows you to give up part of your salary in return for your employer paying more into your pension.

Under the current rules, this can be a highly efficient way to save, as it may reduce National Insurance costs for both you and your employer. But the rules are changing from April 2029, when the National Insurance benefit will be restricted. That means now could be a good time to understand how salary sacrifice works and consider whether you can make the most of it while the current advantages are still available.

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What is salary sacrifice?

Salary sacrifice is an arrangement where you agree to give up part of your gross salary and, in return, your employer pays that amount into your pension instead. In practical terms, your contractual pay is reduced and your pension contribution is made by the employer rather than being taken from your pay afterwards. That matters because salary sacrifice changes how Income Tax and National Insurance are calculated on your earnings.  

For many workplace pension members, it is one of the simplest ways to make pension saving more efficient. Instead of paying into a pension from taxed pay, the contribution is made before your salary reaches your bank account. This can improve take home pay, increase the amount going into your pension, or do a bit of both, depending on how your employer has set the scheme up.  

How does salary sacrifice help with pensions?

The main attraction of salary sacrifice is that it can make pension saving more efficient without requiring you to invest more of your disposable income. Because your salary is reduced, you do not pay Income Tax or National insurance on the amount being sacrificed, therefore, overall you pay less National Insurance and Income Tax because you have less salary. Your employer also pays less employer National Insurance on that part of pay.  

Some employers keep their own National Insurance saving, while others choose to add some or all of it to your pension. When that happens, salary sacrifice can become especially powerful because the pension receives more money than it would under a standard employee contribution arrangement.  

There can also be wider planning benefits. Salary sacrifice lowers taxable pay and adjusted net income, which may help some people tipping into higher tax thresholds linked to the personal allowance taper or support eligibility for certain forms of childcare support. That will remain the case even after the future salary sacrifice reform takes effect.  

What are the tax savings with salary sacrifice?

Employee savings

For employees, the saving comes through lower National Insurance and lower Income Tax as no National Insurance or Income Tax is payable on the amount sacrificed. Under the current rules, salary sacrifice pension contributions reduce the pay on which those deductions are worked out. Both Income Tax and National Insurance are calculated after the sacrifice has been made.  

That means a pension saver can often build a larger retirement pot more efficiently than through an ordinary deduction from net pay. For basic rate taxpayers the result is often straightforward and visible on the payslip. For higher earners, the benefit can be even more noticeable, especially if salary sacrifice is used for regular contributions or bonus sacrifice. The exact gain depends on income level, National Insurance band and whether the employer shares any of its own saving.

Employer savings

Employers also benefit because pension contributions are not normally subject to employer National Insurance, while salary is. The standard employer National Insurance rate is 15 per cent on earnings above the relevant threshold for 2026 to 2027, which is why salary sacrifice can reduce payroll costs.  

That saving creates choices. Some firms use it to offset rising employment costs. Others pass some or all of it into employees’ pensions, which can make salary sacrifice particularly attractive as part of a workplace benefits package. For businesses trying to improve pension engagement without sharply increasing overall reward spend, salary sacrifice has often looked like a practical middle ground.

Are there any disadvantages to salary sacrifice?

Salary sacrifice is not right for everyone. Because it reduces contractual salary, it can affect anything linked to your official pay figure. In some cases that may include mortgage affordability assessments, redundancy calculations, life cover linked to salary, or statutory payments such as maternity pay, paternity pay or sick pay. HMRC says salary sacrifice can reduce statutory pay and, in some circumstances, can remove entitlement if earnings fall below the lower earnings limit.  

There is also a practical limit for lower earners. A salary sacrifice arrangement cannot reduce cash pay below the National Minimum Wage or National Living Wage. That means some employees, especially those on lower or variable earnings, may not be able to use it fully or at all.  

This is why salary sacrifice should be seen as a planning tool rather than a default choice. The savings can be valuable, but the wider impact on pay related benefits and borrowing needs to be checked first.

Who benefits from salary sacrifice?

In broad terms, salary sacrifice tends to work best for employees with enough headroom above minimum wage, stable earnings and a workplace pension scheme that is already well organised. It can be particularly useful for higher earners, people making larger pension contributions and employees whose employer shares its own National Insurance saving.  

Employers can benefit too, especially if they want a tax efficient way to support pension saving while managing payroll costs. HMRC commissioned research published in 2025 showing that salary sacrifice was already a significant feature of employer pension thinking, and that potential National Insurance reform could influence whether employers continue to offer it in the same way. 

That said, the biggest winners have often been those making sizeable pension contributions through salary sacrifice year after year. That point matters because it helps explain why the government has now decided to intervene.

What is changing?

The government announced at Autumn Budget 2025 that the National Insurance advantage of pension salary sacrifice will be restricted from 6 April 2029. From that date, only the first £2,000 a year of employee pension contributions made through salary sacrifice will remain exempt from National Insurance. Any amount above that will be subject to both employee and employer National Insurance. Pension contributions made this way will still remain exempt from Income Tax, subject to the usual pension limits.  

This is a significant shift. At the moment, there is no equivalent National Insurance cap on pension contributions made through salary sacrifice. From April 2029, the structure remains in place, but much of the National Insurance advantage disappears once contributions go over the new annual limit.  

How much could pension savers using salary sacrifice lose?

The answer depends on how much is being sacrificed above the new £2,000 limit and which National Insurance rate applies to the employee.

For modest contributors, the impact may be limited. For larger pension savers, especially those using salary sacrifice heavily, the difference could be meaningful. The Office for Budget Responsibility estimate cited by the House of Commons suggests the reform will raise £4.7 billion in 2029 to 2030 and £2.6 billion in 2030 to 2031, which underlines how much value the current National Insurance relief provides.  

The people most likely to feel the change are those sacrificing well above £2,000 a year, including higher earners and employees using salary sacrifice for bonus planning. They may still want to use salary sacrifice, because the Income Tax treatment remains valuable, but the numbers will look less compelling than they do today.  

Why has the government announced this change?

The government’s published explanation is that these reforms are aimed at tax reliefs whose cost has been rising and which disproportionately benefit wealthier individuals. In other words, ministers see the current rules as generous, expensive and unevenly distributed.  

There is also a clear fiscal motive. The reform raises revenue without removing pension tax relief entirely. Salary sacrifice for pensions will continue, and contributions will still be exempt from Income Tax, but the National Insurance advantage will be narrower and more controlled. That allows the government to keep encouraging pension saving while collecting more from larger contributions.  

Talk through your pension options

Salary sacrifice can still be a useful way to pay into a pension, but it is worth reviewing how well it fits your wider plans. It may still work well now, especially if your employer adds some of its own National Insurance saving into your pension, but the position could look less attractive once the rules change in April 2029.

One option is to keep using salary sacrifice if it remains efficient for your level of earnings and contribution. Another is to review how much you are sacrificing, especially if you pay in larger amounts and may be affected by the new £2,000 annual National Insurance exemption limit from 6 April 2029. It can also be sensible to check how a lower contractual salary could affect things like borrowing, statutory pay and other benefits.

The key is to prepare early. Salary sacrifice is still valuable, but those making larger pension contributions may want to review their approach before the new rules begin.

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This article is for information only and does not constitute individual advice. The information provided in this article is based on the current allowances and legislation and is subject to change.

The Financial Conduct Authority (FCA) does not regulate trust or tax advice.

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available.  

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change. You should seek advice to understand your options at retirement.