What is salary sacrifice?

Salary sacrifice is an arrangement where an employee gives up part of their salary for a non-cash benefit, most often extra pension contributions. Because the sacrificed pay is not taxed as salary, both the employee and employer save income tax and National Insurance. From April 2029 the NI saving on pensions will be capped at £2,000 a year.

With pension salary sacrifice, your contractual salary falls and your employer pays the difference into your pension. You pay no income tax or employee National Insurance on that amount. Your employer also saves its 15% National Insurance, and some pass part of that saving into your pension. A basic rate taxpayer saves 20% income tax and 8% National Insurance on each pound sacrificed. That makes it worth more than a normal pension contribution.

Salary sacrifice can also be used for electric company cars, cycle to work schemes and some childcare. Most other benefits lost their tax advantages in 2017. Because your official salary is lower, it can affect things like mortgage applications and some statutory payments, so it needs care. An employer must agree to offer it, and it must be set up properly in the employment contract.

The National Insurance Contributions Act 2026, which became law on 29 April 2026, limits the NI saving on pension salary sacrifice. From 6 April 2029, only the first £2,000 a year of sacrificed pay will be free of NI. Income tax relief on pension contributions is not affected. The government says the change targets the arrangements that mostly benefit higher earners.

Who it affects: Workers sacrificing salary into pensions