Reforms to pension salary sacrifice rules are not due to take effect until April 2029, but employees and employers should begin thinking about the implications now. Salary sacrifice has become increasingly common among larger employers, offering notable benefits when compared to contributing from after-tax income.
How Salary Sacrifice Works Today
Currently, salary sacrifice arrangements offer several advantages to employees:
National Insurance Contribution (NIC) Savings
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No employee NICs (up to 8%) on the salary sacrificed
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No employer NICs (normally 15%) on the foregone salary — and employers may share some or all of this saving by enhancing pension contributions
Immediate and Full Income Tax Relief
Salary sacrifice also delivers full tax relief instantly, whereas personal contributions may initially only receive basic-rate relief, with higher/additional rate taxpayers reclaiming the balance later through HMRC.
What Will Change in 2029?
While income tax relief will remain unchanged in 2029/30, both employer and employee NIC exemptions will be capped on the first £2,000 of sacrificed salary.
This means higher earners and employers may see reduced efficiency from sacrificing salary above that level.
Example: Salary Sacrifice After Reform
Below is an example for a higher-rate taxpayer (outside Scotland) who diverts £5,000 of salary into a pension, with the employer contributing two-thirds of their NIC saving (10% out of 15%) into the pension pot.
(In 2029/30, employer and employee NIC savings will only apply to the first £2,000 of sacrificed salary.)
Half of the income tax relief in this context is applied at source, with the remainder reclaimed from HMRC for higher/additional rate taxpayers.
Who Benefits Most from Salary Sacrifice?
Salary sacrifice can be particularly valuable for employees whose income places them into certain tax traps:
1. High-Income Child Benefit Charge
Triggered once income exceeds £60,000.
For couples (married or not), the higher income determines the charge, not the combined income.
2. Personal Allowance Taper (Effective 60% Tax)
Income between £100,000 and £125,140 sees personal allowances withdrawn, creating an effective marginal tax rate of up to 60% (or 67.5% in Scotland).
3. Loss of Tax-Free Childcare
Eligibility ends when income exceeds £100,000.
Again, for couples, only the higher income is assessed.
By reducing taxable income, salary sacrifice can help mitigate these thresholds — at least until the new rules take effect.
Planning Ahead Before 2029
With reforms not taking effect until 2029/30, there are still four tax years (including the remaining months of 2025/26) during which employees may continue to benefit fully from the current rules.
This presents an opportunity for strategic year-end tax planning and forward budgeting for both employees and employers.
Important Notes
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The value of investments and income from them can fall as well as rise, and investors may not get back what they originally invested — even considering tax benefits.
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Tax treatment varies according to individual circumstances and is subject to change.
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The Financial Conduct Authority does not regulate tax advice.
Talk to Us About Pension Strategy & Tax Planning
Salary sacrifice remains a powerful planning tool, but the rules are changing — and early preparation can make a difference. If you want to understand how the reforms may affect your income, benefits, or retirement savings, we’re here to help.
Contact Chartwell Wealth Management today to discuss pension contributions, salary sacrifice planning, and personalised tax-efficient strategies.
