Salary sacrifice pension schemes – can they support your employees?

Written by Nicola Gater | 9th September 2026

What is a salary sacrifice pension?

Salary sacrifice allows an employee to give up part of their salary in exchange for a benefit – in this case, a pension contribution.

Because the contribution is made before income tax and NI are calculated, the employee pays these on the lower salary that remains. The amount they’ve ‘sacrificed’ then goes into their pension, alongside the employer contributions you’d normally make.

For employers, there can be a benefit in that you don’t pay employer NI on the amount an employee has sacrificed, which can make salary sacrifice a relatively straightforward way to add value to your benefits package.

And while pensions are one of the most common uses, salary sacrifice can also be used for benefits such as cycle to work schemes and company cars (see more below).

What is changing from April 2029?

At the moment, there is no limit on the amount an employee can sacrifice into their pension without NI being charged. From 6^th April 2029, that will change.

The first £2,000 a year will continue to be exempt from NI, but contributions above that amount will be subject to NI for both the employee and employer.

The current rules remain in place until then, which gives you time to take stock, understand the likely impact, and make sure employees receive clear, helpful information before anything changes.

What should employers do now?

Because the cap is still a few years away, there is no need to panic. But it is a good opportunity to review your current pension arrangements and consider how clearly salary sacrifice is explained to employees.

If you already offer salary sacrifice, do your employees understand what it means? Is it explained clearly when someone joins the business?

You may also want to look at whether your scheme allows employees to exchange some or all of a bonus. If it does, this could give employees another opportunity to make use of the current NI exemption before the £2,000 cap comes in.

Some employees may decide they want to increase their pension contributions while the current rules are still in place. Others may decide it is not right for them at the moment. The important thing is that they have clear, accessible information so they can make an informed choice.

What else do we need to consider?

As with any benefit, communication really matters. Employees need to understand the wider implications of salary sacrifice, not just the potential tax and NI savings.

A lower salary can reduce an employee’s entitlement to earnings-related benefits from the government, such as Universal Credit and Additional State Pension. Depending on your company’s schemes, it may also affect their maternity, paternity and adoption pay, or other benefits linked to salary, such as Death in Service cover. You’ll also need to decide whether overtime premiums and bonuses are calculated on the “old” or “new” salary figure.

As ever, any salary sacrifice arrangement must never take an employee’s pay below the National Living Wage, and the implications for things like Universal Credit, statutory pay, and other salary-linked benefits should be communicated clearly before anyone agrees to sacrifice part of their salary.

Agreements are intended to be in place long term, and at least 12 months. However HMRC do accept changes to the arrangements without consequences in the event the employee’s financial circumstances change, such as through marriage, divorce or a partner becoming redundant or pregnant.

What about childcare vouchers and other benefits?

The original Childcare Voucher scheme closed to new joiners back in 2018, so if an employee wasn’t already enrolled before then, you can’t offer them the vouchers now. They are only available to employees who joined before the scheme closed.

Salary sacrifice can still be used for other benefits, such as cycle to work schemes, company cars and electric vehicles, gym memberships, additional annual leave, or health insurance. However not all salary sacrifice benefit schemes deliver the same tax advantages, and for these Benefit in Kind tax will usually still apply, so employees need to understand the full implications before signing up.

What are the wider benefits of a salary sacrifice pension?

Tax efficiency

A salary sacrifice pension changes an employee’s pay package to make it more tax efficient, at no additional cost to you or the employee. Giving up part of their salary means they take home less on paper, but pay less income tax and NI on their earnings, while typically seeing the same or a larger amount go into their pension pot.

As an employer, this is where the savings for your business have become more significant recently. Employer National Insurance rose to 15%, with a lower secondary threshold, from April 2025. That means the NI saving you make on every pound of salary sacrificed into pension contributions is worth more to your business today than it was a couple of years ago.

So, at least until the 2029 cap takes effect, a salary sacrifice pension scheme could be a useful way to manage people costs while still supporting employees’ financial wellbeing.

It gives employees financial flexibility

Pensions are one of the most common ways employees use salary sacrifice, but they are not the only option. As we’ve mentioned, you can also offer benefits such as cycle to work schemes, gym memberships, additional annual leave, health insurance and more, giving employees access to support that can boost wellbeing and help ease financial worries if tax advantages also apply.

Arrangements don’t have to be permanent either – depending on the benefit, they can be set up for a year or two rather than indefinitely, depending on what an employee wants or needs at that stage of their career.

It makes you an attractive employer

Offering a salary sacrifice pension can add value to your overall benefits package, helping you attract new talent and retain the people you already have. Employers that show they support employee wellbeing, including physical, mental and financial wellbeing, are often more attractive to job seekers. In fact, 58% of employees would start looking for a new position if their employer did not offer benefits or reduced them, according to research by recruitment consultancy Robert Walters.

Will a salary sacrifice pension work for our employees?

A salary sacrifice pension scheme can be a really positive benefit, but it will not be right for everyone in the same way. Employees will need to weigh up the pros and cons based on their own circumstances.

The benefit being offered must be attractive and have some value for them, so as a business it’s worth thinking carefully about which options you offer under the scheme. You should also be upfront that an employee will be taking home less pay each month, and so will have less cash income for their normal outgoings. Do make this absolutely clear as the scheme may not suit everyone.

Used well, salary sacrifice pension schemes can provide reassurance, support longer-term financial wellbeing and help employees feel that their employer is thinking about the pressures they may be facing now, as well as their future plans.

If you have questions about setting up a salary sacrifice pension scheme, preparing for the 2029 changes or reviewing your benefits package, we’d be happy to help. Please get in touch with our team by emailing us at info@realityhr.co.uk or calling 01256 328 428.

About the author: Nicola Gater, Head of Product and Process

Nicola has vast experience in a broad range of sectors and expertise in the employment implications of mergers and acquisitions, including the challenges of TUPE regulations. Nicola also works on diversity and inclusion projects, company culture exercises, rewards and performance management programmes, and day-to-day HR.