What Is Salary Sacrifice for Pensions? (UK 2025/26)

Salary sacrifice is a contractual arrangement between you and your employer. You agree to give up part of your gross salary, and in return your employer pays that amount into your pension. Because the money goes in before tax and National Insurance are calculated, you save both — unlike standard pension contributions, which only save income tax.

How It Saves You Money

With a normal pension contribution made through relief at source, you receive income tax relief but still pay National Insurance on your full salary. With salary sacrifice, your contractual salary is reduced first, meaning neither you nor your employer pay NICs on the sacrificed amount. For a basic-rate taxpayer paying 8% employee NICs, this is an additional 8% saving on top of the 20% tax relief. For higher-rate taxpayers, the NIC saving is 2% (above the upper earnings limit), but the income tax relief is 40%.

Why It Matters for the £100k Trap

Salary sacrifice reduces your adjusted net income — the figure HMRC uses to determine personal allowance taper, Child Benefit High Income Charge, and eligibility for free childcare. This makes it a powerful planning tool for anyone earning near £100,000.

Changes Coming in April 2029

The government announced at Autumn Budget 2025 that from April 2029, the NIC exemption for salary sacrifice pension contributions will be capped at £2,000 per year. Contributions above that amount will attract both employer and employee NICs, though income tax relief will remain unaffected. Currently, around 56% of employees making typical pension contributions through salary sacrifice will be unaffected by the new cap.

Important Caveats

Your salary after sacrifice cannot fall below the National Minimum Wage (£12.21/hour for 2025/26). Salary sacrifice also reduces your official salary on paper, which may affect mortgage affordability assessments, statutory maternity pay calculations, and life insurance benefits linked to salary.