Salary Sacrifice Explained

Salary sacrifice is often talked about as a tax-saving perk, but for many people it still feels confusing or slightly risky. Some assume it’s only for very high earners, while others worry they’re “giving up” income they might need later.

In reality, salary sacrifice is simply a way of restructuring how you’re paid, most commonly to improve pension saving efficiency. When used thoughtfully, it can support long-term financial security, help manage tax thresholds, and make retirement planning more effective.

This article explains how salary sacrifice works, who it may suit, and what changes are coming in the years ahead.

What is salary sacrifice?

Salary sacrifice is an agreement between an employee and their employer where part of the employee’s salary is exchanged for a non-cash benefit. In the UK, the most common use of salary sacrifice is for pension contributions.

Instead of receiving part of your salary as pay, that amount is paid directly into your pension by your employer. Because this portion of income is “sacrificed”, it is no longer treated as salary and is therefore not subject to Income Tax or National Insurance.

The key distinction is that salary sacrifice happens before tax and National Insurance are applied, which is why it can be more efficient than making pension contributions from take-home pay.

Why salary sacrifice has become more relevant

Salary sacrifice has existed for many years, but it has become more widely discussed as tax rules have tightened and household finances have come under pressure.

Rising National Insurance rates, frozen tax thresholds, and greater awareness of retirement shortfalls have all played a part. For many people, salary sacrifice offers a way to increase pension saving without dramatically reducing monthly take-home pay.

For employers, it has also become a valued benefit, helping to support staff wellbeing while reducing National Insurance costs.

How salary sacrifice works in practice

When salary sacrifice is in place, your contractual salary is reduced by an agreed amount. Your employer then pays this amount directly into your pension.

Because the sacrificed amount never becomes taxable income:

• You do not pay Income Tax on it
• You do not pay employee National Insurance on it

In many cases, employers also save National Insurance and may choose to add some or all of that saving into the pension as an additional contribution.

Over time, this can result in significantly higher pension contributions for a relatively modest impact on take-home pay.

Using salary sacrifice to manage tax thresholds

One of the most powerful and often overlooked benefits of salary sacrifice is its ability to help manage income around key tax thresholds.

Because salary sacrifice reduces gross contractual income, it can be used strategically to avoid higher tax bands or the withdrawal of valuable allowances.

Avoiding the 60% tax trap

In the UK, income between £100,000 and £125,140 is effectively taxed at 60%, due to the gradual removal of the personal allowance once income exceeds £100,000.

For people in this range, salary sacrifice can be particularly valuable. By sacrificing income into a pension, it may be possible to bring taxable income back below £100,000 — restoring the personal allowance and significantly reducing the overall tax bill.

Rather than losing income to tax, salary sacrifice allows that money to be redirected into long-term savings.

Preserving Child Benefit

Salary sacrifice can also help families affected by the High Income Child Benefit Charge.

Where one parent has adjusted net income above £60,000, Child Benefit begins to be clawed back. Once income reaches £80,000, the benefit is effectively lost altogether.

By reducing gross income through salary sacrifice, some families can remain below these thresholds, keeping Child Benefit in full or in part while simultaneously increasing pension contributions.

This is particularly relevant where income has gradually increased over time, and Child Benefit has quietly disappeared without much notice.

National Insurance savings and why they matter

Another reason salary sacrifice is so effective is that it reduces National Insurance, not just Income Tax.

National Insurance is often overlooked, but it can significantly reduce take-home pay over a working lifetime. Salary sacrifice is one of the few straightforward ways to reduce both Income Tax and National Insurance at the same time.

For employers, the National Insurance savings can be substantial, which is why many choose to share these savings by increasing pension contributions further.

What’s changing from April 2029: the £2,000 NI cap

While salary sacrifice remains a valuable planning tool, it’s important to understand how the rules are set to change.

From 6 April 2029, a new limit will apply to the amount of salary that can be sacrificed into a pension while remaining exempt from National Insurance.

Under the new rules:

• Only the first £2,000 per tax year of salary sacrificed into a pension will be free from National Insurance
• Any amount sacrificed above £2,000 will be treated as earnings for NI purposes
• Employee National Insurance (8% or 2%, depending on earnings level) will apply above the cap
• Employer National Insurance (currently 15%) will also apply above the cap
• Income tax treatment remains unchanged — pension contributions will still receive income tax relief

Importantly, this change does not cap how much can be contributed to a pension. It simply restricts the National Insurance advantage of larger salary sacrifice arrangements.

The cap applies only to pension salary sacrifice. Other salary sacrifice schemes, such as cycle-to-work or electric vehicle schemes, are not affected.

Does salary sacrifice still make sense?

Even with the introduction of the £2,000 National Insurance cap, salary sacrifice will continue to play an important role in financial planning.

It will still:

• Provide full income tax relief on pension contributions
• Help manage income around key tax thresholds
• Support long-term retirement planning
• Remain simpler and more transparent than many alternative strategies

The direction of travel is clear: tax advantages are being narrowed rather than removed. This makes thoughtful, forward-looking planning more important than ever.

When salary sacrifice may not be appropriate

Salary sacrifice isn’t right for everyone.

It may be less suitable where income is irregular, cash flow is tight, or where salary-linked benefits such as mortgage affordability, life cover, or statutory pay are a key consideration. It is also not appropriate if it would reduce income close to the minimum wage thresholds.

Efficiency should never come at the expense of financial security or peace of mind.

Final thoughts

Salary sacrifice is not a loophole or a quick fix. It is simply a way of structuring income and pension saving more efficiently.

For some, it’s about boosting retirement savings. For others, it’s about managing tax thresholds or preserving valuable benefits. For many, it’s a combination of all three.

As with most financial decisions, the real value lies not in the tax saving itself, but in understanding how salary sacrifice fits into your wider financial picture now and in the years ahead.