Salary Sacrifice for Pension Schemes: An Update

Following the recent Budget announcements (November 2025), we’ve had a noticeable increase in conversations with employers about salary sacrifice (also known as salary exchange) for pension schemes. Unfortunately, much of this dialogue has been shaped by headlines rather than facts.

We’re hearing phrases like “Salary sacrifice is no longer worth it”, “the savings are disappearing” and, more worryingly, seeing employers consider closing salary sacrifice to new joiners altogether to ‘future proof’ their benefits strategy.

This article aims to cut through the noise, explain what salary sacrifice actually is, how it works today, how it will work following the announced changes, and why education and good employee benefits advice, not withdrawal, are the smart response.

What is salary sacrifice (salary exchange)?

Salary sacrifice is an arrangement where an employee agrees to give up part of their contractual gross salary in exchange for an employer pension contribution of the same value.

Rather than the employee paying a pension contribution from salary, the employer pays it on their behalf. This reduces the employee’s contractual salary and, as a result, both the employee and employer usually pay less National Insurance contributions (NICs).

Key points:

• The total pension contribution remains the same (or can be increased).
• The employee takes home more pay compared to a traditional employee contribution.
• The employer makes an NIC saving, which can be retained or reinvested (often into the pension).

How salary sacrifice works now

Under the current rules:

• Employees save employee NICs on the sacrificed amount (either 8% or 2% based on tax thresholds)
• Employers save employer NICs (currently 15%).
• The arrangement is compatible with automatic enrolment, provided minimum contribution and National Minimum Wage (NMW) rules are met.

For many employers, salary sacrifice has become a core part of their benefits strategy because it:

• Improves employee take-home pay without increasing cost
• Creates tangible employer savings
• Enhances pension engagement when communicated well

What’s changing, and more importantly what isn’t

The Budget announcements understandably caused concern, but the reality is far less dramatic than initial reporting suggested.

What is changing

From April 2029:

• NIC savings from salary sacrifice will be capped at £2,000 per employee per year.

This means employers or employees will no longer receive unlimited NIC savings for anything sacrificed above the £2,000 cap.

What is not changing

• Salary sacrifice is not being removed.
• Employee income tax relief still applies.
• NIC savings still exist – they are simply capped.
• Higher earners, particularly additional rate taxpayers, continue to benefit significantly to help navigate the 60% tax trap or other income related tax thresholds.

Importantly, this change is three years away. Stopping or restricting access now does not ‘future proof’ a scheme – it simply removes value prematurely.

The risk of stopping salary sacrifice for new joiners

We’ve recently seen employers consider closing salary sacrifice to new members of staff, believing this avoids future complexity or cost.

This is not a smart move.

Why?

• It can create a two-tier workforce, undermining fairness and engagement whilst creating an ‘old guard’ mentality and hostilities in the workplace .
• It removes a valued benefit years before any changes take effect.
• It avoids education rather than addressing it.

A better approach is to keep salary sacrifice in place, clearly communicate how it works now, and explain how it will evolve over time.

Case study: acting early and future proofing through education

Company ABC faced the same concerns following the Budget announcement. Initial reaction was caution, but with adviser support they took a more strategic view. Initially they had decided they didn’t want to implement salary exchange as they thought it would be short lived.

The current position

Based on the changes to the National Minimum Wage from April 2026 which restricted eligible employees:

• Company ABC will generate approximately £20,600 per annum in employer NIC savings through salary sacrifice.
• These savings will apply each year until April 2029.

Rather than delaying or restricting access, the company chose to implement salary sacrifice sooner, maximising savings while they remain uncapped.

After the £2,000 cap (from April 2029)

With future planning in mind, Company ABC:

• Excluded employees earning under £28,000 per annum to ensure ongoing NMW compliance.
• Accepted that employer NIC savings would reduce but still remain meaningful.

Projected savings after the cap:

• Approximately £17,000 per annum in employer NIC savings.

Crucially, employees were educated early about:

• Why savings would be restricted in future
• What this means (and doesn’t mean) for their pension
• The long-term value of staying in the scheme

The result? Continued savings, maintained fairness, and higher trust.

Don’t forget higher earners

Even with the NIC cap, salary sacrifice remains highly valuable for higher and additional rate taxpayers.

In particular, it continues to help employees avoid the 60% effective tax trap caused by the personal allowance taper between £100,000 and £125,140.

For this group, salary sacrifice is often one of the most effective and straightforward tax planning tools available.

The real solution: education and advice

The biggest risk following the Budget isn’t the policy change, it’s poor decision-making driven by misunderstanding.

Salary sacrifice doesn’t need to be removed or diluted. It needs to be:

• Clearly explained
• Properly governed
• Future proofed through thoughtful design

An adviser who understands both pensions and workforce communication can help employers:

• Model savings now and in the future
• Adjust eligibility responsibly
• Educate employees before changes happen, not after

Frequently asked questions

1. What is salary sacrifice (salary exchange) for pensions?

Salary sacrifice is an arrangement where an employee gives up part of their gross salary and the employer pays that amount into their pension instead. This usually reduces National Insurance contributions for both the employee and the employer.

2. Is salary sacrifice being removed following the 2025 autumn Budget?

No. Salary sacrifice is not being removed. From April 2029, employer National Insurance savings will be capped, but the arrangement itself will continue to exist.

3. Does salary sacrifice still provide value to employees?

Yes. Employees continue to benefit from income tax relief and employee NIC savings (where applicable). Higher and additional rate taxpayers often see particularly strong value.

4. Does salary sacrifice still save employers money?

Yes. Employers continue to make NIC savings. While these savings will be capped from April 2029, meaningful savings remain both before and after the changes.

5. What exactly is changing in 2029?

From April 2029, employer NIC savings through salary sacrifice will be capped at £2,000 per employee per year. There is no change before this date.

6. Should employers stop offering salary sacrifice to future employees?

No. Closing salary sacrifice to new joiners creates a two-tier workforce and removes a valued benefit unnecessarily. A better approach is education and forward planning.

7. How does salary sacrifice interact with the National Minimum Wage?

Employees cannot sacrifice salary if it would take their pay below the National Minimum Wage. This needs to be monitored carefully, particularly as NMW rates increase.

8. Is salary sacrifice still worthwhile for higher earners?

Absolutely. Salary sacrifice remains one of the most effective ways for higher earners to reduce tax and, in some cases, avoid the 60% effective tax trap caused by the personal allowance taper.

9. Can employers future proof salary sacrifice schemes?

Yes. Employers can future proof schemes by reviewing eligibility, modelling future savings, and clearly communicating how the benefit may evolve over time rather than removing it altogether.

10. What’s the biggest mistake employers are making right now?

Reacting to headlines rather than facts. The biggest risk isn’t the policy change itself, but poor communication and rushed decisions that reduce employee trust and engagement.