Salary sacrifice explained: what it saves, what it costs and what changes in 2029

What salary sacrifice actually is

Salary sacrifice, sometimes called salary exchange, is a change to your employment contract. You agree to a lower salary, and your employer pays the difference into your workplace pension as an employer contribution. Because that money is never paid to you as salary, it never attracts income tax or National Insurance.

That is the key difference from the two other ways of paying into a workplace pension:

• Net pay arrangement. Your contribution comes out of your pay before income tax is worked out, so you get tax relief straight away. You still pay National Insurance on it.
• Relief at source. Your contribution comes out of your pay after tax. The pension provider claims 20% basic-rate relief from HMRC and adds it to your pot. Higher-rate taxpayers have to claim the rest themselves. National Insurance is still paid on the full salary.

Salary sacrifice gives the same income tax relief as the net pay arrangement, plus a National Insurance saving. In 2026/27 that saving is 8% on earnings between £12,570 and £50,270, and 2% above that. Your employer also saves 15% employer National Insurance, and some employers pass part or all of that saving into your pension.

What it costs you: three worked examples

The best way to see salary sacrifice is to compare take-home pay with and without it. These figures come from our tax engine for 2026/27 in England, Wales and Northern Ireland, with a standard 1257L tax code and no student loan.

At £35,000, take-home pay drops from £28,719.60 to £27,459.60. The £1,750 sacrificed would have cost 20% income tax and 8% National Insurance, so £490 of it was never going to reach you. You give up £1,260 and your pension receives £1,750.

At £60,000, the whole £3,000 comes out of income taxed at 40%, with 2% National Insurance. Take-home falls from £45,357.40 to £43,617.40. That's £1,740 for £3,000 of pension, about 58p in the pound.

At £110,000, the sacrifice also brings your adjusted net income back down to £100,000 and restores the personal allowance you'd otherwise lose. Take-home falls from £72,357.40 to £68,557.40, so £10,000 of pension costs you £3,800. Our guide to the £100k tax trap explains why the relief is so generous in that band.

If your employer passes on some of its 15% National Insurance saving, the numbers get better still. On a £3,000 sacrifice that's up to £450 a year extra into your pension, at no cost to you.

The knock-on effects people miss

Salary sacrifice works by lowering your contractual salary. Anything else calculated from that salary can be affected too. None of these is a reason to avoid sacrifice, but each is a reason to time it carefully.

Mortgage borrowing

Mortgage lenders assess affordability from your income, and some use your salary after sacrifice rather than before it. If a lender lends around 4.5 times income, a £35,000 salary supports about £157,500 of borrowing. Sacrifice £1,750 and a lender using the lower figure would offer about £149,600, nearly £8,000 less.

Practice varies. Some lenders add the sacrifice back, especially for pension contributions, and a mortgage broker will know which ones do. If you're close to the edge on affordability, ask before you apply. Don't assume you can stop the sacrifice the month before: many schemes only allow changes at set times, and lenders usually want to see several recent payslips.

Statutory maternity and paternity pay

Statutory Maternity Pay is based on your average weekly earnings over an eight-week reference period, and those earnings are measured after salary sacrifice. For the first six weeks you get 90% of that average. After that you get £194.32 a week in 2026/27, or 90% of your average if that is lower.

Take someone on £40,000 who sacrifices 10%. Their average weekly earnings fall from about £769 to about £692. Six weeks at 90% pays about £623 a week instead of £692, which is roughly £415 less in total. The remaining 33 weeks are paid at the flat £194.32 either way, so the gap is confined to the first six weeks.

Two things soften this. Many employers pay contractual maternity pay above the statutory minimum, often based on your full notional salary, so check your policy. And while you're on paid maternity leave, employer pension contributions generally have to continue as if you were working normally. Sacrificed amounts count as employer contributions, so your pension may keep growing at the full rate.

Other things linked to salary

• Student loans. Repayments are 9% (or 6% for a Postgraduate Loan) of earnings over the threshold, measured after sacrifice. A lower salary means lower repayments. For many Plan 2 borrowers that's a genuine bonus, because they're unlikely to repay in full. See our Plan 2 vs Plan 5 overpayment guide.
• Child Benefit and childcare support. Sacrifice reduces adjusted net income, so it can cut or remove the High Income Child Benefit Charge, and keep you under the £100,000 limit for Tax-Free Childcare and funded childcare hours.
• Life cover, redundancy and overtime. Death-in-service benefits, redundancy pay and overtime rates may be based on your sacrificed salary or on a notional pre-sacrifice salary. Your contract or scheme booklet should say which.
• National Minimum Wage. A sacrifice cannot take your pay below the minimum wage, so employers cap it for lower earners.

What changes in April 2029

At the November 2025 Budget, the government announced a cap on the National Insurance advantage of pension salary sacrifice. It is now law under the National Insurance Contributions (Employer Pensions Contributions) Act 2026, and takes effect on 6 April 2029.

From that date, only the first £2,000 a year sacrificed into a pension will be free of National Insurance. Contributions above £2,000 will attract both employee and employer NI as if they were salary. Three things don't change:

1. Income tax relief on the full amount sacrificed stays the same.
2. Ordinary employer pension contributions, the ones your employer pays on top of your salary, remain free of NI.
3. Sacrifice for other purposes, such as cycle-to-work or electric car schemes, is outside this particular cap.

At today's rates, the change is modest for most people. A basic-rate taxpayer sacrificing £4,000 would pay 8% NI on the £2,000 above the cap, which is £160 a year. A higher-rate taxpayer whose sacrifice comes entirely from pay above £50,270 would pay 2%, which is £40 on £2,000. The larger effect may be on employers, who lose up to 15% on the excess. Some may respond by trimming the extra contributions they pass on, so watch for scheme changes before 2029.

Until then, nothing changes. If salary sacrifice suits you now, the cap is not a reason to delay. You keep the full saving for every year up to April 2029.

When salary sacrifice is the right choice

For most employees who are already saving into a workplace pension, salary sacrifice is the cheapest way to do it. It is especially valuable if:

• Your income is between £100,000 and £125,140, where you face a 60% effective tax rate, or 62% including NI.
• You're close to the £60,000 Child Benefit threshold or the £100,000 childcare limit.
• You're a Plan 2 student loan borrower who doesn't expect to clear the balance.
• Your employer adds some or all of its NI saving to your pension.

It's worth pausing, reducing or timing the sacrifice if:

• You're applying for a mortgage soon and your affordability is tight.
• You expect to start maternity or shared parental leave within the next year or so, and your employer only pays the statutory minimum.
• Your salary is close to the National Minimum Wage or the Lower Earnings Limit.

The money you sacrifice is locked into your pension until at least the minimum pension age, which rises from 55 to 57 in April 2028. Make sure your emergency fund and any higher-interest debt are dealt with first. Our debt snowball vs avalanche guide can help with the second.

How to set it up

Salary sacrifice has to be offered by your employer, and most large employers do. Look in your benefits portal or staff handbook, or ask HR or payroll. You'll usually choose a percentage of salary or a fixed amount. The change takes effect from a future payroll date, and your payslip will show a lower gross salary with no separate pension deduction.

Before you sign, check three things: when you're allowed to change the amount, whether your employer passes on any of its NI saving, and which salary figure is used for life cover, pay rises and redundancy. Then put your own figures into the salary sacrifice calculator to see the cost per pound before you commit.