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.
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
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.