Salary Sacrifice Explained: Pensions, EVs and the 2029 NI Cap

Salary sacrifice (sometimes called salary exchange) is an agreement to give up part of your contractual salary in return for a non-cash benefit, most often an extra employer pension contribution. Because the sacrificed pay is never paid to you, you don’t pay Income Tax or National Insurance on it, and nor does your employer.

How it works

Say you earn £40,000 and agree to sacrifice 5% (£2,000) for an employer pension contribution:

• your contractual salary becomes £38,000;
• your employer pays the £2,000 straight into your pension;
• you pay tax and NI on £38,000 instead of £40,000;
• your employer saves 15% NI on the £2,000, which some employers add to your pension too.

£40,000 salary, 5% pension	Take-home pay	Into pension
No pension	£32,320	£0
Relief at source (you pay 4%)	£30,720	£2,000
Salary sacrifice	£30,880	£2,000

With salary sacrifice, the same £2,000 pension costs you £1,440 of take-home pay, against £1,600 with relief at source. The difference is the 8% NI saved.

Schemes you can use it for

• Pension contributions, the most common and valuable
• Electric and ultra-low-emission cars: low benefit-in-kind rates make EV salary sacrifice very tax-efficient
• Cycle to work schemes
• Workplace nurseries
• Technology and home electronics (taxable, so usually less efficient)

The April 2029 change

The November 2025 Budget announced that from 6 April 2029, only the first £2,000 a year of pension contributions made through salary sacrifice will be free of National Insurance. Contributions above £2,000 will attract both employee and employer NI. Income Tax relief is unchanged.

For most basic-rate taxpayers sacrificing modest amounts, little changes. Higher earners who sacrifice large sums, for example to escape the £100k tax trap, will lose some of the NI saving but keep the Income Tax benefit, which is the bigger part.

The downsides

Salary sacrifice reduces your contractual salary, which can affect:

• Mortgage applications. Some lenders use your post-sacrifice salary.
• Statutory pay. Maternity, paternity and sick pay are based on actual earnings.
• Life cover and income protection linked to salary.
• The minimum wage. Sacrifice can’t take your pay below it.
• Flexibility. You can usually only change your sacrifice once a year or after a life event.

Many employers use a reference salary for pay rises and benefits so you aren’t penalised. Ask HR.

Salary sacrifice vs relief at source vs net pay

Method	Income Tax relief	NI saving	How it shows on your payslip
Salary sacrifice	Yes	Yes	Lower gross pay
Net pay arrangement	Yes	No	Deducted before tax
Relief at source	Yes (20% added by provider; higher-rate reclaimed)	No	Deducted after tax at 80%

Model it yourself

To see how much of a raise you keep with and without sacrifice, use the pay rise calculator. For how NI is charged in each pay period, see how National Insurance works. In the take-home pay calculator, open Pension and choose your scheme type to compare. The Calculated on option switches between full salary and auto-enrolment qualifying earnings (£6,240 to £50,270), which many employers use for minimum contributions.