Salary sacrifice swaps part of your gross pay for an employer pension contribution. Because the money never counts as salary, neither you nor your employer pays National Insurance on it, and you get income tax relief at your marginal rate automatically rather than claiming it back.
Why employers like it too
The employer saves secondary National Insurance at 15% on everything sacrificed. Some keep that saving; better ones add it to your pension, which costs them nothing and is worth real money to you over a career. It is always worth asking which yours does.
The change coming in April 2029
At Budget 2025 the government announced that from 6 April 2029, only the first £2,000 of employee pension contributions made through salary sacrifice each year will keep the National Insurance exemption. Above that, both employer and employee National Insurance will apply as with any other workplace pension contribution.
Income tax relief is not affected. This is a National Insurance change, and it does not arrive until 2029 — but if you are setting up a scheme now, it belongs in the modelling.
How the tax relief works, and why there is nothing to claim
This is where salary sacrifice differs from every other way of paying into a pension, and it catches out higher rate taxpayers who are used to claiming. With a normal relief-at-source scheme your provider adds basic rate relief to what you pay in, and if you are a higher or additional rate taxpayer you claim the rest through Self Assessment. With salary sacrifice you claim nothing, because there is nothing to claim: the money was never your pay in the first place, so it was never taxed.
The practical effect is that relief lands at your marginal rate immediately rather than months later, and a 40% taxpayer does not have to remember to ask for the other 20%. The catch is the mirror image — if you have been putting a sacrificed contribution on your tax return as a personal contribution, you have been claiming relief twice on money that was never taxed once.
Do not enter salary-sacrificed contributions as personal pension contributions on a Self Assessment return. They belong to the employer, not to you.
What HMRC needs to see
Salary sacrifice is a change to the employment contract, not a payroll setting, and HMRC treats it that way. Three things have to be true. The employee has to agree to the variation. The contract has to be clear about what the cash and non-cash entitlements are at any given moment. And the change has to be in place before the pay is earned — an arrangement applied retrospectively to salary somebody has already worked for is not salary sacrifice, and HMRC will treat the pay as pay.
If HMRC asks, what it asks for is the varied terms and payslips from before and after the change. Keeping those two things together at the time costs nothing; reconstructing them two years later is unpleasant. The other hard limit is the National Minimum Wage, which sacrifice can never take an employee below.
What it can cost you
Sacrificing reduces your gross salary, and gross salary is what mortgage lenders assess, what statutory maternity pay is based on, and what some benefits are calculated from. It also cannot take you below the National Minimum Wage, which quietly rules it out for lower-paid staff.
Common questions
Do I still get tax relief on a salary sacrifice pension?
You get the relief, but you never claim it, and that trips up higher rate taxpayers who are used to claiming through Self Assessment. Sacrificed money is not your pay, so it is never taxed and there is nothing to reclaim — relief effectively lands at your marginal rate on the day. That also means a sacrificed contribution must not go on your tax return as a personal pension contribution: doing so claims relief a second time on money that was never taxed once.
Does HMRC have to approve a salary sacrifice arrangement?
No, there is no approval process and no form to send in. What HMRC expects instead is evidence that the arrangement is real: the employee agreed to a variation of their contract, the contract is clear about the cash and non-cash entitlements, and the change was in place before the pay was earned. If it is queried, HMRC asks for the varied terms and payslips from either side of the change. An arrangement backdated onto salary somebody has already worked for is not salary sacrifice and will be taxed as ordinary pay.
Is salary sacrifice worth it for a basic rate taxpayer?
Usually yes, though less dramatically than for a higher rate taxpayer. A basic rate employee saves 20% income tax and 8% National Insurance, so £100 of pension costs about £72 of take-home pay. The bigger consideration at lower salaries is the effect on gross pay for mortgage and benefit purposes, and the National Minimum Wage floor, which prevents sacrifice taking pay below the statutory minimum.
Can I use it for things other than pensions?
Yes — cycle to work, ultra-low-emission cars and workplace nurseries are the common ones, and electric car schemes have grown quickly because the benefit-in-kind rates on EVs remain low. The tax treatment varies by benefit, and most other salary sacrifice arrangements were brought into line with normal benefit-in-kind rules some years ago. The April 2029 change announced at Budget 2025 concerns pension contributions specifically.
Does it affect my State Pension?
It can, if sacrifice takes your earnings below the lower earnings limit for National Insurance purposes, because qualifying years are built on recorded earnings. For most employees on normal salaries it makes no difference at all. If you are close to that threshold, or working part-time, it is worth checking before you sacrifice a large amount.