Don't give up on salary sacrifice
This article first appeared in IFA Magazine in January 2026.
While the Government has targeted salary sacrifice for increased scrutiny and future restrictions, it remains a highly advantageous and effective tool for both employees and employers.
The budget on 26 November 2025 announced the proposal to restrict National Insurance (NI) savings to the first £2,000 of salary sacrificed for pension contributions.
From April 2029, this £2,000 cap is likely to result in reductions to pension contributions in some instances, but there will still be significant advantages to continue with salary sacrifice, even in excess of £2,000, from this date.
The first point to clarify is that salary sacrifice isn’t limited to £2,000, it’s just the NI savings for employees and employers that are limited to the first £2,000 sacrificed. This is quite significant as salary sacrifice enjoys benefits in excess of just the NI saving.
Tax bands and traps
Although only the first £2,000 sacrificed will benefit from NI savings, sacrificing beyond this figure will still reduce adjusted net income and potentially keep or take an individual below a tax threshold, or perhaps keep them out of a tax trap. Tax traps are bands of income where the effective rate of tax exceeds the headline rate. For example, if child benefit is being lost because the highest earner in the household is earning £70,000, sacrificing salary of £10,000, even though only £2,000 benefits from NI saving, will recoup the otherwise lost child benefit, and prevent paying an effective rate of potentially much higher.
Tax relief
Another benefit of salary sacrifice beyond the NI saving is the ability to secure tax relief beyond 20% at source, and for this relief to go into the pension fund. When the relief at source system is being used, 20% tax relief is given at source and anything above this needs to be claimed from HMRC by the scheme member. Some people neglect to claim this relief, and even those that do claim it usually get this relief in the form of an altered tax code. So, while the tax relief is received, it doesn’t necessarily go to the pension plan unless the scheme member makes an additional individual contribution. Using salary sacrifice enables the scheme member to get their full marginal rate of tax relief into their pension fund without needing to claim anything from HMRC.
The importance of this shouldn’t be overlooked. Take a higher rate taxpayer sacrificing £10,000 above the £2,000 cap. Even if, currently, all NI savings are redirected to the employee’s pension scheme, the changes in 2029 are likely to reduce the pension contribution by £1,700 (15% employer + 2% employee). Cancelling the salary sacrifice arrangement and operating the standard relief at source system could see this scheme member missing out on the higher rate tax relief going into their pension. Yes, they could claim it back and pay it into their pension, but not all will and their pension pot at the point of taking benefits will be lower as a result.
Research from Royal London shows that 15% of people with household income in excess of £200,000 expect to only meet the “minimum” two-person household figure quoted in the Pensions UK Retirement Living Standard of £21,600, demonstrating the importance of maximising pension savings at all income levels.
A further reason to maintain salary sacrifice arrangements post April 2029 is that many employees simply won’t be impacted by the proposed changes. The average full time adult salary in the UK is approximately £35,000 p.a. A worker contributing the standard 5% employee contribution within an automatic enrolment scheme would see their gross contribution as £1,750. If salary sacrifice is being used for this employee, even where they redirect all employee NI savings to the pension, the amount of salary sacrificed is £1,944.44, and therefore within the cap. In fact, the budget document claims that 74% of basic rate taxpayers will be shielded by the £2,000 cap.
While the proposed changes to salary sacrifice have the potential to reduce pension contributions for employees and push up costs for employers, which is regrettable in light of widespread pension underfunding, the continued use of salary sacrifice post April 2029 still has the potential to improve pension outcomes for those sacrificing above the £2,000 cap.
