In the Autumn Budget, the government announced a major change that will impact some workers saving into pensions.
The change relates to salary sacrifice – a scheme used by many companies to channel employees’ savings into pensions in a tax-efficient way.
For some, the change could reduce tax benefits they have enjoyed until now, but the good news is that salary sacrifice is still one of the smartest ways to boost your pension. What’s more, the changes won’t come in until 2029 – giving you time to plan.
In this article, we’ll cover what has changed, what it means for your retirement, and how you can still make the most of this valuable benefit.
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What is salary sacrifice?
Salary sacrifice is an agreement between you and your employer where you give up part of your cash pay in exchange for a non-cash benefit. Instead of receiving that money as taxable pay, your employer directs it into something else – quite often into a workplace pension, but sometimes other benefits such as a Cycle to Work scheme.
Because your taxable income is lower, you pay less income tax and National Insurance (NI). Your employer also saves NI, and some employers pass those savings back into your pension.
Salary sacrifice can only be set up by your employer – and not all employers offer it. You can still make additional pension contributions without it, but they’re treated differently for tax purposes depending on your scheme.
Who benefits from salary sacrifice?
It can be helpful for a range of people, but here are three groups who might find it particularly useful:
- You’re close to certain “cliff edges” at which you lose valuable tax allowances or benefits and want to keep your taxable income below the threshold. For example, someone might try to bring their income below the £100,000 threshold at which they start to lose their personal allowance or below the £80,000 threshold at which they lose all child benefit. Alternatively, they might be on the brink of becoming a higher rate taxpayer and want to bring themselves down to the basic rate.
- You want to boost your pension savings tax-efficiently.
- Your employer offers matching contributions or passes on NI savings.
Higher earners often make the biggest gains, but salary sacrifice can benefit anyone thinking long-term about retirement.
What has changed?
Until now, pension contributions made via salary sacrifice have been exempt from both income tax and NI, making them highly efficient for employees and employers alike.
However, the Government has announced that, as of April 2029, it is capping the maximum amount of your salary you can sacrifice into a pension without incurring NI to £2,000 per year.
Any pension contributions above that £2,000 cap will, from 2029, incur both employee and employer National Insurance contributions.
Will this impact me?
For some people, the new cap won’t change a thing.
If you earn £40,000 and pay 5% of your salary into your pension via salary sacrifice, that works out to £2,000 a year. In this case, you haven’t exceeded the cap and neither you nor your employer will be paying any more NI.
However, those putting more than £2,000 into their pension via salary sacrifice will have an extra NI bill.
For example, if you’re earning £40,000 and putting 10% of that into a pension via salary sacrifice, that works out to £4,000 per year. That means £2,000 of your contribution is over the cap and will be subject to NI in future.
National Insurance for employees is 8% on earnings between £12,570 and £50,270, so 8% of £2,000 would mean an extra NI bill for the employee of £160.
What about higher earners?
The changes will impact higher earners too.
If you’re earning £110,000 a year and want to bring that down to £100,000 to restore your personal allowance, you could sacrifice £10,000 (or just under 10%) of your salary and put it into your pension. Under current rules, there would be no NI to pay on that £10,000.
However, under the new £2,000 cap, you will be paying NI on £8,000 of that money. The NI rate for employees on earnings over £50,270 is 2% – so that would also mean an extra NI bill of £160.
Does this make salary sacrifice less attractive?
The change does make salary sacrifice slightly less attractive for those caught out by the cap. But remember, you’re still benefitting from income tax relief – which means this continues to be a really efficient way of putting your salary to work.
And, for those facing those income cliff edges, it remains a great way of bringing yourself below those thresholds.
What you need to watch out for
Even though there are many upsides, there are trade-offs to consider with salary sacrifice.
Because your official salary is lower, this can affect earnings-linked benefits such as statutory maternity or paternity pay, and potentially things like life cover tied to your salary. If your NI contributions fall below key thresholds, it could even affect your State Pension record.
It may also impact how much you can borrow for a mortgage, since lenders use your contractual salary for affordability checks.
And if you’re sacrificing pay into your pension, remember that this money is normally locked away until at least age 55 (rising to 57 on 6 April 2028) – so it’s not suitable if you might need quick access to those funds.
What should I do next?
For lots of people, the answer will be: nothing. Your employer will contact you to inform you of any changes, so you don’t need to get in touch with them.
However, this could be a good opportunity to check whether you are at or near any of those cliff edges at which you lose valuable allowances or benefits.
If you are, it’s worth considering whether you want to use salary sacrifice to reduce your pay and restore those benefits.
Finally, if you will be impacted, you may want to consider making the most of salary sacrifice before the changes come in by paying a lump sum into your pension or by increasing your contributions in the meantime.