Planning ahead for pension salary sacrifice changes

Salary sacrifice

Under a salary sacrifice arrangement, your employee gives up some of their salary in return for a benefit. At the very least, this results in employees’ NI savings, and where the benefit is exempt will also deliver income tax and employers’ NI savings.

The rules on salary sacrifice arrangements were tightened considerably from April 2017 meaning that now only a handful of benefits can be provided tax efficiently through a salary sacrifice arrangement, which includes pension contributions.

Boost pension contributions

The use of salary sacrifice arrangements to swap cash salary for employer pension contributions increased in popularity following the hike in employers’ NI to 15% from 6 April 2025.

Employee pension contributions attract tax relief (subject to the earnings cap and the employee’s available annual allowance), but they do not benefit from NI relief. However, there is no NI to pay on employer contributions to a pension scheme. Therefore, both the employer and the employee can benefit by entering into a salary sacrifice arrangement whereby the employee gives up cash pay in return for an employer pension contribution.

Example. An employee pays £200 a month into a pension scheme (£2,400 per year). The employee will benefit from tax relief on their contributions, but there is no NI relief. Depending whether the employee pays NI at 8% or 2%, either £16 or £4 NI is payable on the salary paid into their pension. The employer will pay employers’ NI of £30. If, instead, the employer and employee enter into a salary sacrifice arrangement whereby the employee sacrifices £2,400 of their annual salary in return for an employer pension contribution, the employee’s cash pay will drop by £200 a month, saving them £16/£4 in NI. The employer will save £30 a month (£360 a year). The contribution to the employee’s pension is unchanged but both the employee and employer save NI.

The changes don’t come in until 2029 so you can use a salary sacrifice arrangement for pension contributions without limit until April 2029. The greater the contribution, the greater the NI savings.

Changes in 2029

From 6 April 2029, only the first £2,000 pension contributions (per employee, per year) made through a salary sacrifice scheme will be exempt from NI. This will limit the employee’s savings to £160 for basic rate taxpayers or £40 per year for higher rate taxpayers. Your savings will be restricted to £300 per year, per employee. Assuming you already have employees contributing more than £2,000 per year under salary sacrifice, your business will have a hefty NI bill if you don’t take action.

Mitigating the effects

Ensure unlimited salary sacrifice arrangements only run to 5 April 2029, and encourage employees to increase the amount sacrificed in 2026/27 and 2027/28. New arrangements should be put in place from 6 April 2029, capping the contributions at £2,000 per annum.

You can still save NI at 15% if you unilaterally decide to increase employer pension contributions instead of giving employees a pay rise from 6 April 2029.