What is salary sacrifice and how could it boost your pension?
Salary sacrifice is a great way to increase your pension pot while lowering your tax bill. But the rules are changing from April 2029. We look at what salary sacrifice is and how to make the most of it now.
Laura Miller
Salary sacrifice can be one of the most effective means of boosting your personal wealth, and it could be worth seriously considering especially if you’re wondering how to spend your annual bonus. But the rules are changing – and most workers are unaware how, according to new research.
At the end of April 2026, a change in salary sacrifice policy, originally announced in the Autumn Budget 2025, was passed into law. It means – barring any future U-turns – there will be a cap on how much benefit you can get from paying into a pension via salary sacrifice from April 2029.
So you might want to act soon to take advantage of this generous benefit – especially as two in five (39%) business leaders who currently offer salary or bonus sacrifice schemes say they are less likely to provide the scheme in future because of the changes, according to new research from the Standard Life Centre for the Future of Retirement.
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What is salary sacrifice?
Salary sacrifice is an agreement to reduce your cash pay, usually in return for a non-cash benefit. That could include pension contributions, medical insurance or even a car.
“Using salary exchange [for pension contributions] is a way for more money to go into your pension but without any extra cost,” says Moffatt.
“The benefit is that you pay less income tax and National Insurance. That’s because your salary is reduced before tax and National Insurance is taken off. Your employer also pays less employers’ National Insurance, and they might pass on some or all of this saving to you.”
That double whammy of income tax and National Insurance is what makes salary sacrifice such an appealing target for the cash-strapped chancellor.
“The dual tax and NI advantages mean pension salary sacrifice has frequently come under scrutiny, as the government searches for opportunities to reduce tax reliefs and boost revenue without explicitly raising rates,” said Young.
Higher or additional rate taxpayers who are in a group personal pension get an additional benefit by using salary sacrifice, as they receive all the tax relief rather than having to claim anything above basic rate back from HMRC.
How salary sacrifice for pensions works
Moffatt gives a hypothetical example of Maria, who earns £35,000 and lives in England during the 2024/25 tax year. Maria’s employer returns 50% of the National Insurance savings from salary sacrifice to employees.
“She pays tax, National Insurance and an employee pension contribution of £1,400 and her employer pays £1,050 into her pension. This means Maria has a take home salary of £27,320. If she chooses salary exchange, it means her salary is lower, just under £33,056. She makes no pension contribution and that’s because her employer makes it all on her behalf.
“Maria’s take home salary is still £27,320. But the tax and National Insurance saving means that there is now £3,129 going into her pension instead of £2,450. Even if Maria’s employer didn’t pay some of their National Insurance saving in, it would still mean a reduction in tax and National Insurance for Maria.”
Workers could boost their pension pots by £41,200 – more than a year’s average salary – by opting into their employers' salary exchange scheme, according to figures from Scottish Widows.
Average salary workers – taking home £37,4301 annually – could increase their take home pay by £150 a year, simply by opting into their employers' salary exchange scheme. If this extra cash is then redirected into their pension pot, alongside the savings the employer makes through reduced National Insurance contributions, their pension savings would be boosted by £528 a year.
For a worker aged 30 and retiring at age 67, and assuming 5% investment growth, this would add £41,200 to their pension savings. Those opting in a decade later, at age 40, would see a £24,500 boost to their pension pot.
What are the changes to salary sacrifice?
The government is changing how salary sacrifice for pension contributions works. From April 2029, the amount that is exempt from National Insurance contributions (NICs) will be capped at £2,000 a year for employee contributions made via salary sacrifice. This was announced in the 2025 Autumn Budget and the changes to pension salary sacrifice are set to affect 3.3 million workers.
Employers and employees can still make contributions above £2,000 through salary sacrifice arrangements, and these contributions will be exempt from income tax. However, employee contributions above this amount will be subject to employer and employee NICs like other employee workplace pension contributions.
Employees who choose to sacrifice salary to receive tax-free childcare or Child Benefit can keep doing so. However, any pension contributions above £2,000 will be subject to employer and employee NICs.
If you are an employee you will not need to contact HMRC. Employers will make the necessary changes so that NICs apply to contributions above £2,000.
The move to curb the attractiveness of pension salary sacrifice has been met with criticism that it will leave employees with smaller pensions. Someone aged 35 earning £50,000 a year could face a hole in their pension of £22,060 by age 65 under the cap on salary sacrifice, according to analysis by investment platform AJ Bell. This assumes they already have a pension fund of £30,000 and save an overall contribution of 5% personally, with another 3% coming from their employer.
The black hole rises to over £37,000 if they are already a higher earner on £75,000 or even nearly £50,000 for those earning £100,000 a year, based on the same assumptions.
The 2025 salary sacrifice changes do not affect limited company directors. Directors don’t use salary sacrifice, they use employer pension contributions, which are unchanged.
Controversially, the biggest impact of the change will be on workers earning between £45,000 and £50,000, as their take home pay decreases more than others, according to calculations by AJ Bell. “This is due to NI contributions dropping from 8% on earnings between £12,570 and £50,270 to 2% above that threshold. Any excess over the £2,000 cap will be charged at 8% for those earning just below £50,000, while those earning above £50,000 pay only 2%,” said Rachel Vahey, head of public policy at AJ Bell.
The below table shows the impact on employees’ pay packets and the extra NI bill to employers per year, assuming the employee has agreed to exchange 6% of their total notional salary for a pension contribution, with a 6% employer match.
Total notional salary | Employee contribution (6% sacrificed) | Contribution over cap (not exempt from NI) | Reduction in take home pay | Cost to employer (extra NI) |
£40,000 | £2,400 | £400 | £32 | £60 |
£45,000 | £2,700 | £700 | £56 | £105 |
£50,000 | £3,000 | £1,000 | £80 | £150 |
£55,000 | £4,300 | £1,300 | £26 | £195 |
£60,000 | £3,600 | £1,600 | £32 | £240 |
£65,000 | £3,900 | £1,900 | £38 | £285 |
£70,000 | £4,200 | £2,200 | £44 | £330 |
£75,000 | £4,500 | £2,500 | £50 | £375 |
Source: AJ Bell. Figures based on when the changes come into effect in 2029.
Is salary sacrifice just for your pension?
Most people tend to associate salary sacrifice with pension contributions, but it can be applied to a wide range of other benefits.
For example, there are salary sacrifice electric car schemes, where employees sacrifice some pre-tax salary in exchange for the monthly lease on an electric vehicle (EV). These enable employers to lease EVs from manufacturers, and for employees to then lease these from the employer, with the same tax advantages that pension salary sacrifice offers.
Other salary sacrifice schemes include workplace nursery schemes, which offer help with the cost of childcare, or technology schemes that could help spread the cost of a new phone or laptop.
There is also the cycle to work scheme, which helps cover the cost of a bicycle through salary sacrifice.
Area | Belief | Reality |
Tax and National Insurance | 23% don’t think it reduces tax or NI; 32% are unsure | It usually reduces the amount of tax and NI you pay |
Mortgage borrowing | 31% don’t think it affects borrowing; 48% don’t know | It can reduce borrowing capacity |
Childcare vouchers and nursery payments | 20% think these aren’t included | Childcare vouchers and nursery payments are available through salary sacrifice |
Take-home pay | 62% think it means taking home less pay; 23% are unsure | Take-home pay may be lower, but is exchanged for benefits like pension contributions |
Company car | 28% are unsure whether it can be used to purchase a company car | Salary sacrifice can be used for company car schemes |
Minimum wage | 15% believe it can take cash earnings below the National Minimum Wage | It cannot reduce pay below minimum wage by law |
Source: Barnett Waddingham
Can you use salary sacrifice on your bonus?
If you’re expecting a bonus, you may be wondering what the best way to spend it is. Some employers offer a bonus exchange scheme, which has similar benefits to salary exchange – with the perk of not reducing your monthly income.
“The key things to consider are immediate financial priorities like debt which you may want to pay off immediately,” Susan Hope, retirement expert at Scottish Widows, tells MoneyWeek.
“Secondly, when you might need this cash, for example savings for an emergency or savings goals in the medium-term.
“If it’s money that you don’t need for any of those types of things, using salary exchange to put it into your pension could help not only boost your pot, but for higher earners it could also help when it comes to tax, childcare benefit and personal allowance.”
For a basic rate taxpayer, paying directly into a pension using salary exchange could change a £5,000 bonus into a £6,090 pension contribution in the 2024/25 tax year, or a £6,150 contribution from 2025/26, once the reductions in employer and employee NICs are taken into account.
