What you need to know about upcoming salary sacrifice changes

One of the most heavily criticised announcements from the Autumn Budget was the confirmation of new, tighter, rules on salary sacrifice – a move that will make millions of workers’ pension contributions less tax-effective.

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The announcement came after pensions consultancy LCP shared previously unpublished figures from the Department of Work and Pensions (DWP), which show that as many as 14.6 million people in the UK are already saving too little for retirement and heading for a sharp drop in living standards.

And with these figures working on the assumption that the state pension triple lock will remain in force for the next 50 years, those numbers could be much higher.

But it seems salary sacrifice for pensions has become a victim of its own success, with the chancellor pronouncing that the cost of relief is forecast to nearly treble from £2.8 billion in 2017, to £8 billion by 2030. She also claimed that the biggest benefits were going to higher earners and those who work in financial services.

Here’s what’s happening and what you need to know.

What is salary sacrifice?

Salary sacrifice – sometimes called salary exchange – involves giving up a portion of your salary in return for a non-cash benefit from your employer.

This makes it a really tax-effective way to pay into your workplace pension, and it works by exchanging some of your salary for a larger contribution from your employer.

This has two key tax benefits. First, there’s an income tax saving because, on paper, you’ve got a lower taxable income. Second, there won’t be any national insurance (NI) to pay on that money – saving you 8% on earnings up to £50,270 and 2% thereafter, and your employer 15% (which, if you’re lucky, they’ll pass on to you). You can either use this saving to increase your take-home pay, or keep your pay the same and make a bigger contribution to your retirement pot.

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Pension contributions aren’t the only way to use salary sacrifice. You can also use it to cut the cost of buying a bike (through the Cycle to Work scheme) or an electric car, to save on childcare, even get a few extra days holiday.

Employers don’t have to offer salary sacrifice schemes, but they’ve historically been open to the idea, because it offers them an opportunity to reduce their NI bill. It’s also recognised as a helpful workplace perk that can help with both recruitment and retention.

There are some potential downsides to salary sacrifice including a lower level of employer-sponsored life insurance as it’s usually based on a multiple of your salary. A lower salary may also restrict you when you apply for a mortgage (although some lenders can be flexible and take your reference salary into account). Low earners might also find it affects their entitlement to certain state benefits such as statutory maternity pay or the state pension (if your salary falls below the minimum required to pay national insurance).

That said, for most employees, making pension contributions with salary sacrifice is considered to be a bit of a “no-brainer”.

What’s changing?

Salary sacrifice isn’t being scrapped altogether.

Rather, the government has decided to place a £2,000 cap on the amount of money that employees can pay into salary sacrifice arrangements and make a saving on NI.

That works out at roughly £167 a month.

You can still pay more money in and continue to get the income tax savings – you (and your employer) just won’t get any further relief on NI.

From a pension point of view, this means that any amounts over £2,000 will be treated in the same way for tax purposes as a typical employee pension contribution.

The new cap will come into force from 6 April 2029.

Budget documents claim that the additional national insurance raised by the measure would amount to £4.7 billion in 2029-30 and £2.6 billion the following year.

Who will be affected by the new salary sacrifice rules?

You’ll be affected by the change if you make pension contributions using salary sacrifice (and sacrifice more than £2,000 a year). In order to do this, you would have made a formal agreement with your employer to reduce your salary. If you aren’t sure, check with HR.

According to analysis from HMRC, around 7.7 million workers were using salary sacrifice in 2024. That’s estimated to be a third of those working in the private sector and a tenth of public sector workers.

What can you do?

The announcement is most certainly a blow to workers with salary sacrifice schemes.

Experts across the board have expressed concern that constant rule changing on pensions is acting as a disincentive to save for retirement and is undermining trust. Some also fear that the removal of benefits for employers could prompt them to downgrade the pension provision they offer staff.

The only – albeit minor – positive is that the new rules won’t come into force until April 2029.

That means you should have over three years to carry on making the most of the scheme. If you can afford to do so – now is the time to increase your pension contributions, to make the most of the NI benefit, while you still can.

You might also want to consider using “bonus sacrifice” if you can – something LCP has suggested might be “killed off” by the new rules.

It might take a bit of willpower, but paying a bonus into your pension – rather than taking it as taxed income – can be an incredibly savvy move tax wise.

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Let’s take the example of Sam who earns £70,000 a year, and is expecting a £10,000 bonus.

After 40% income tax and 2% national insurance have been deducted, she’ll end up with just £5,800 going into her bank account.

But if Sam decided to pay the bonus into her pension instead, she’d get the full £10,000 saved towards her retirement – an increase on the net amount of roughly 72%. And, with the benefit of compounding over the years, forgoing her bonus in the short term could make a very real difference to her eventual retirement income.

Basic-rate taxpayers might not get such large bonuses, but they stand to make a bigger national insurance saving - 8% compared to 2% - if they pay them into their pension.

Another benefit is that, depending on the size of their bonus, paying it into a pension could also prevent it tipping you into a higher-rate tax bracket.

You can pay as much as you like into your workplace pension, so long as your total contributions for the year don’t exceed the current £60,000 allowance (or 100% of your total income if lower).

Tidy up your pensions

Finally, any assault on your retirement pot provides a timely reminder to stay on top of your “pension housekeeping” – depending on how organised you’ve been so far, that could be an opportunity to offset your losses.

For example, if you have a handful of old workplace pensions that you’re not contributing to anymore, it might be worth consolidating them into a new personal pension, such as a self-invested personal pension (SIPP).

This could open your savings up to new (and potentially better-performing) investments and reduce your costs as many online SIPPs will charge lower fees. This means you get to keep more of your investment returns, which can make a real difference to your eventual retirement income over the years.

You just need to check that you won’t lose any valuable benefits when you transfer (such as guaranteed annuity rates on older pensions) and be mindful of any exit fees that may apply.

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And, if you think you might have lost track of any old workplace pensions, now’s the time to hunt them down. According to the Pensions Policy Institute (PPI), there’s currently 3.3 million lost pensions, worth an average of £9,470.

If you can’t find your paperwork, it’s worth getting in touch with former employers (or even colleagues) to find out which provider your policy might be with. Failing that, you can try the government’s free pension tracing service.