Pensions can be an incredibly effective retirement saving tool because you enjoy certain tax benefits. Unlike non-ISA savings accounts or General Investment Accounts (GIA), any growth on the wealth in your pension is tax-free.
Additionally, the government typically adds tax relief on top of your contributions, helping you build your pot faster.
Unfortunately, during her 2025 Budget, chancellor Rachel Reeves announced upcoming changes to pension legislation that may limit tax benefits for certain savers – namely those who use a salary sacrifice scheme.
Read on to learn how salary sacrifice works and what the changes could mean for you after April 2029.
Salary sacrifice offers a more tax-efficient way to contribute to your pension
Salary sacrifice schemes allow employees to exchange a portion of their salary for certain benefits. These might include:
- Company cars
- Cycle to work schemes
- Gym memberships
- Private medical insurance
- Pension contributions
If you pay your pension contributions outside a salary sacrifice scheme, HMRC calculates the Income Tax and National Insurance contributions (NICs) you owe based on your salary. Then, you pay your pension contributions from the remaining funds, and your employer pays in too.
In comparison, if you opt for salary sacrifice, you give up a percentage of your earnings equal to your portion of the pension contribution. Your employer then puts the full amount directly into your pension.
For example, if you earn £60,000 and have a total pension contribution of 8% – 5% from you and 3% from your employer – this would amount to £4,800.
If you used salary sacrifice, your earnings would fall by £3,000 as this is your 5% portion of the pension contribution. Your employer then puts the full £4,800 into your pension.
So, your pension contribution doesn’t change, but your salary is technically £57,000. This means that, when HMRC calculates your Income Tax and NICs, you pay less.
As an added bonus, your employer makes a saving because their NICs are also calculated based on your salary.
This means that salary sacrifice benefits both you and your employer and can increase your take-home pay without diminishing your pension savings. Alternatively, you might decide to add the saving to your pension and increase the size of your retirement pot.
From April 2029, the National Insurance relief from salary sacrifice will only apply to contributions up to £2,000
In a bid to raise additional revenue, the chancellor announced that she would put a cap on the NIC saving from salary sacrifice.
From April 2029, both employers and employees will only benefit from the NIC saving on contributions up to £2,000. Any contributions that exceed this will still be free from Income Tax, but you and your employer will pay NICs on this amount.
This means that, while salary sacrifice could still be a tax-efficient way to pay into your pension, the benefits will be diminished. You may need to consider how this affects your financial plan, especially if you’re currently using salary sacrifice.
The government estimates that the change will affect 44% of savers who use salary sacrifice
According to estimates from the UK government, around 7.7 million employees currently use salary sacrifice to make pension contributions. However, the change won’t affect all those savers because some will contribute less than £2,000 to their pension each year.
The government estimates that 3.3 million employees sacrifice more than £2,000, meaning around 44% of people currently using salary sacrifice will be affected. Crucially, higher earners who pay more into their pensions will see the most significant ramifications.
Fortunately, the changes are scheduled for April 2029. This means that you have time to plan accordingly and adjust your retirement strategy.
We can review your retirement savings and consider how changes to salary sacrifice will affect the amount you are able to build up in your pension. Then, where necessary, we can suggest adjustments to help you keep your retirement plan on track.
Get in touch
We can explain precisely how changes to salary sacrifice will affect you personally.
Please give us a call on 01276 855717 or email info@braywealth.com today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
HM Revenue and Customs’ practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Approved by the Openwork Partnership on 30/12/2025
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