Salary Sacrifice: The NI Saving Your Employer Probably Hasn't Mentioned

With a salary sacrifice arrangement, you agree to give up part of your salary and, in return, your employer puts that same amount into your pension for you.

So, rather than receiving the money as salary and then paying it into your pension yourself, your employer pays it straight into your pension.

The benefit of this is that it is taken directly from your gross salary, so before Income Tax and National Insurance are calculated.

This means both you and your employer have less National Insurance to pay on the remaining amount, making it a benefit for employers too.

Not all workplaces offer a salary sacrifice scheme, however, so you’ll need to check with your HR department or employer if it applies to your job.

The exact saving depends on your earnings, tax position and how your employer operates its scheme.

But let’s say you earn £55,000 a year and decide to sacrifice £5,000 of your salary into your pension.

Without salary sacrifice, you would receive £55,000 as salary, with Income Tax and National Insurance then calculated on that amount.

With salary sacrifice, your contractual salary becomes £50,000, while your employer pays the £5,000 directly into your pension.

Because the £5,000 is no longer treated as salary for National Insurance purposes, an employee paying the standard 8% rate could save around £400 in National Insurance (assuming you have no other complications affecting your NIC calculation).

One thing to be aware of is that there are limits on how much you can save into your pension each tax year while still benefiting from pension tax rules.

For 2026/27, the standard pension annual allowance is £60,000.

This applies to contributions from you and your employer across any and all of your pensions, although your allowance could be lower in some circumstances – and higher in others (for example, if you are carrying forward unused allowance from previous tax years).

It’s best to speak to an independent financial adviser if you have questions about your pension allowance.

There are other benefits to lowering your ‘adjusted net income’ (the amount that HMRC uses to calculate how much income tax you need to pay).

It can bring your income into a lower income tax band, for example, and allow you to keep access to valuable childcare allowances and benefits. We’ve produced a guide on some of these benefits here.

And, of course, because your salary is reduced before tax is calculated, you will also pay less income tax on that lower salary.

So, if you’re a basic-rate taxpayer, sacrificing £5,000 could save you up to another £1,000 in Income Tax. For a higher-rate taxpayer, the potential Income Tax saving could be £2,000.

If your employer doesn’t yet offer this scheme, it may be worth pointing out that there are financial benefits for employers of taking this approach.

When you sacrifice part of your salary, your employer’s National Insurance payments can also be lowered because it no longer pays employer National Insurance on the amount you’ve sacrificed.

For 2026/27, the standard employer National Insurance rate is 15% above the relevant threshold.

Some employers choose to pass some or all of this saving on to their employees by adding it to their pension contribution, but not every employer does this, so it’s something worth asking about.

While it can have considerable benefits, salary sacrifice won’t be right for everyone.

Because your contractual salary is lower, salary sacrifice can affect things that are based on your income. That could negatively affect things like mortgage and loan applications.

It will also mean that you have less take home pay because you’re sacrificing some of it (more than would be taken in tax and National Insurance) to your pension.

So, if you need every penny of that income for daily living costs or you’re saving up for more pressing needs, salary sacrifice is unlikely to be right for you.

You also wouldn’t be able to use salary sacrifice to reduce your pay below the National Minimum Wage level so it won’t be available for those on the lowest wages.

The bottom line is, don’t assume salary sacrifice is automatically better; check how it would work for your circumstances. And make sure to ask your employer what other ways it might impact your wages and benefits.

On 6 April 2029, the government is changing how it treats National Insurance on pension salary sacrifice.

The first £2,000 a year of employee pension contributions made through salary sacrifice will continue to be exempt from National Insurance. But contributions above £2,000 will be subject to employee and employer National Insurance.
(Note: the Income Tax treatment of pension contributions isn’t changing; it’s only National Insurance that’s impacted.)

The government estimates that around 7.7 million employees currently use salary sacrifice for pension contributions, with around 3.3 million sacrificing more than £2,000 a year. So, while the benefit isn’t disappearing, the saving will be smaller for people making larger salary-sacrifice contributions from 2029. If salary sacrifice appeals to you, then now is a good time to explore its benefits.

The first thing to do is ask your employer if they offer pension salary sacrifice.

If they do, find out:

• How much you can sacrifice?
• Will your employer pass on any of its part of the National Insurance saving?
• Will salary sacrifice affect your other workplace benefits?
• How will it affect your take-home pay?
• What happens to your pension contributions if you receive a bonus or pay rise?

You can then compare the numbers with your existing pension arrangements.

For many employees, salary sacrifice can be a particularly tax-efficient way to save for retirement.

And if your employer hasn’t mentioned it, it’s certainly worth asking the question.