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Salary sacrifice: what is it and how is it changing?

Jan 28, 2026
From April 2029, the rules around salary sacrifice are changing, so you might be wondering what this means for your pension savings.

 

What is salary sacrifice?

Salary sacrifice is an agreement between you and your employer where you give up a small part of your pay, and your employer pays that amount directly into your pension for you instead. You might hear it called salary sacrifice or SMART pension contributions.

Because your salary is then lower, you pay less National Insurance (NI). This means your take‑home pay can actually go up. Your employer may save on NI too.

You can also use salary sacrifice to pay more into your BRASS or AVC Extra pots.

If you don’t use salary sacrifice, you still get income tax relief on pension contributions, but you don’t get NI savings as well.

How do I know if I have it?

Your employer will have told you if you’re using salary sacrifice when you joined the scheme. If you are, you’ll see it as a deduction on your payslip.

You can only use salary sacrifice if your employer allows it.


Why you might not want salary sacrifice

Even though NI savings can be attractive, salary sacrifice isn’t always best for everyone. For example:

  • A lower salary might affect mortgage applications, loan checks, or some state benefits.
  • If your pay drops below the lower earnings limit, you may not build up NI credits, and you need 35 years of NI for the full State Pension.
  • You can’t use salary sacrifice if it would take your pay below the National Minimum Wage.

How salary sacrifice is changing in 2029 

In the Autumn Budget 2025, the government announced that from April 2029, if you pay more than £2,000 a year into your pension using salary sacrifice, you and your employer will have to pay NI on anything above that £2,000 limit.

Employee pension contributions will still get income tax relief (as long as they are within annual allowance limits), whether they are made through salary sacrifice or not.

You can still use salary sacrifice to pay more than £2,000 a year into your pension, but any amount above the £2,000 cap will be treated like normal pension contributions. That means both you and your employer will pay NI on the extra amount.

What the changes mean for you

Most people who make typical pension contributions won’t notice any difference.

  • Example 1
    If you earn £38,000 and contribute 5% through salary sacrifice, you contribute £1,900 a year. This is below the £2,000 limit, so neither you nor your employer will pay any NI on it.

So, if you save less than £2,000 a year into your pension using salary sacrifice, or you don’t use salary sacrifice at all, these changes won’t affect you.

  • Example 2
    If you earn £50,000 and contribute 5% through salary sacrifice, you contribute £2,500 a year. NI will be due on the £500 above the £2,000 limit. The employee NI contribution is approximately £40 based on today’s rates.

If you already pay more than £2,000 a year through salary sacrifice (or were planning to), you may want to speak to your employer about what the 2029 changes mean and whether your NI bill will increase. Some people may find it helpful to get independent financial advice.

Even with the £2,000 cap before NI applies, salary sacrifice can still reduce your overall tax bill by keeping your income below the higher‑rate tax threshold.

Whatever your situation, these changes should not put you off saving for retirement. Pension savings will continue to offer strong tax advantages, even with the new rules.