Why salary sacrifice saves National Insurance, and what changes in 2029

Salary sacrifice is one of the few arrangements where both employee and employer pay less National Insurance at the same time. A new law caps that effect for pension contributions from April 2029.

Two colleagues can pay exactly the same amount into the same workplace pension and still take home different pay. The difference is often down to how the contribution is made. One may pay from salary after it has been calculated; the other may have agreed to give up part of their salary so that the employer pays it into the pension instead. That second route is salary sacrifice.

How salary sacrifice works

Under salary sacrifice, an employee agrees to a lower contractual salary, and the employer pays the difference into the employee’s pension as an employer contribution. The total going into the pension can stay the same; what changes is the route it takes.

Because the money is no longer salary, it is not subject to Income Tax or National Insurance as pay. Income Tax relief on pension saving is available through other routes anyway, so for tax the end result is broadly similar. The real difference is National Insurance, which ordinary employee pension contributions do not avoid.

Salary sacrifice is a change to the employment contract. It is offered by the employer, not something an employee can set up alone, and the details vary between workplaces.

Where the National Insurance saving comes from

For 2026/27, employees pay Class 1 National Insurance at 8% on earnings between £242 and £967 a week and at 2% above that. Employers pay 15% on earnings above £96 a week, which is about £5,000 a year.

When salary is sacrificed into a pension, both of those charges fall away on the sacrificed amount. The employee keeps the 8% (or 2%) they would have paid, and the employer keeps its 15%. Some employers add part of their own saving to the employee’s pension. That is a choice each employer makes; it is not a rule.

A worked example

The table below follows one employee earning £40,000 a year who sacrifices £4,000 into a workplace pension. All of the salary sits in the band where employee National Insurance is 8%.

Assumes today’s National Insurance rates and thresholds also apply in 2029/30, which is not known. Income Tax relief on the contribution is not affected by the cap and is not shown.

The example shows the shape of the change rather than a forecast. Rates and thresholds can move before 2029, and every employer’s scheme is set up differently.

The £2,000 cap from April 2029

The Budget on 26 November 2025 announced that from 6 April 2029, pension contributions made through salary sacrifice above £2,000 in a tax year will be subject to both employee and employer Class 1 National Insurance. Up to £2,000 a year keeps its current treatment.

Two things are not changing. Ordinary employer pension contributions, paid on top of salary rather than in place of it, keep their National Insurance relief. And Income Tax relief on pension contributions is unaffected. The government’s policy paper estimates that around 3.3 million of the 7.7 million people who use salary sacrifice for pensions, about 44%, sacrifice more than £2,000 a year.

The cap changes the National Insurance on salary sacrifice, not the tax relief on pension saving.

Is it law yet?

Yes. The National Insurance Contributions (Employer Pensions Contributions) Act 2026 received Royal Assent on 29 April 2026. It applies from the 2029/30 tax year onwards. The Act says the first regulations must set the limit at £2,000, and any later reduction would need the approval of both Houses of Parliament.

The detailed rules, such as how payroll will handle the limit across a year, still depend on regulations that have not yet been made. The Budget on 28 October 2026 did not change the cap.

Effects beyond the payslip

Because salary sacrifice lowers contractual pay, it can affect more than National Insurance. HMRC guidance points out several limits:

• A sacrifice cannot take cash pay below the National Minimum Wage.
• Lower earnings can reduce or remove Statutory Maternity Pay and other statutory payments that depend on earnings.
• Some earnings-related state benefits are worked out from the lower salary.

It is also worth knowing which salary figure appears on payslips and in references, since some forms ask for pay before any sacrifice and others for pay after it.

Who this matters for, and what to check

The 2029 cap is most relevant to employees who sacrifice more than £2,000 a year, which includes many people paying higher percentages into a workplace pension in their fifties and sixties, and anyone using salary sacrifice for a one-off contribution such as a bonus. Points to look at:

• How much you sacrifice in a full tax year, including any bonus sacrifice.
• Whether your employer passes on part of its National Insurance saving, and whether that would continue above £2,000.
• Whether your total pension saving is near the yearly limits. Our article on the Money Purchase Annual Allowance explains how the £60,000 annual allowance can drop to £10,000.
• Your tax code, if you also have a second job or pension; our tax code guide covers how that interacts.

Questions about a particular scheme are best put to the employer’s payroll or HR team. Anyone offering paid advice on restructuring pay or pensions can be checked on the FCA Register first.

The short version

Salary sacrifice saves National Insurance for both employee and employer, at 8% (or 2%) and 15% respectively in 2026/27. From 6 April 2029, that saving will apply only to the first £2,000 a year of pension contributions made this way. The change is now law, the detailed regulations are still to come, and Income Tax relief on pension saving is not affected.