Millions of UK workers have a limited window to take full advantage of a valuable pension perk that reduces tax and national insurance (NI) bills. Experts are urging employees to "max out" salary sacrifice arrangements before the rules tighten in April 2029.
What Is Pension Salary Sacrifice?
Salary sacrifice allows employees to exchange part of their salary for a non-cash benefit, such as extra employer pension contributions. By reducing gross pay, workers pay less income tax and NI. Employers also save on NI and may pass some savings into the pension pot.
This arrangement can run alongside standard workplace pensions. If your employer offers additional voluntary contributions, these may be via salary sacrifice.
How It Benefits You
Consider James, who earns £50,000 and receives a £5,000 pay rise, taking his salary to £55,000. Most of the increase (£4,730) falls above the higher-rate tax threshold of £50,270. Normally, that slice is taxed at 40% plus NI, costing £2,062. However, by sacrificing the full £5,000 into his pension, James avoids higher-rate tax, cuts NI, and adds the entire £5,000 to his pension pre-tax.
Who Can Use It?
Only if your employer offers it. An estimated 7.7 million employees already participate. If your employer provides this option, clarify how it affects your pay, and ask if they share their NI savings with your pension. Ensure you can opt in or out if circumstances change.
Changes Coming in April 2029
From April 2029, salary-sacrificed pension contributions above £2,000 per year will no longer be exempt from employer and employee NI. For James, sacrificing £5,000 would mean paying NI on £400, costing an extra £60 (his NI saving drops from £127 to £67). Income tax benefits remain unchanged.
What You Should Do Now
If you haven't signed up, consider doing so. If already enrolled, think about increasing contributions. Steve Webb, former pensions minister, says: "Max out contributions before April 2029. If you plan to boost your pension later, do it now through salary sacrifice for greater NI efficiency." Jason Hollands of Bestinvest adds that this is especially crucial for those in their 50s and 60s catching up on retirement savings.
Why Is the Government Restricting This?
Ministers argue the perk has disproportionately benefited higher earners. However, HMRC data shows 1.2 million basic-rate taxpayers sacrifice more than £2,000. Basic-rate taxpayers pay 8% NI, so the cap affects them more than higher-rate taxpayers (2% NI).
Other Advantages
Salary sacrifice can help avoid tax "cliff edges" near the £50,270 threshold and may reduce the high income child benefit charge for parents earning over £60,000.
Potential Downsides
Reducing salary may lower mortgage affordability, as lenders see lower payslips. It can also reduce statutory benefits like maternity pay, sick pay, and life insurance linked to salary. Check these implications before committing.
