For a benefit so widely used, most people are still using salary sacrifice on autopilot and without knowing what's going on under the bonnet.
This is what Mark Futcher, head of DC pensions at Barnett Waddingham, said after a new poll of UK workers on their understanding of the benefit.
The findings show that one in five (20%) believe it can only be used for pension contributions, despite it also covering benefits such as childcare vouchers and company car schemes. Nearly a third (31%) don't think it affects their mortgage borrowing capacity and 48% don't know. One in six (15%) believe – wrongly – that it can take their cash earnings below the national minimum wage.
Below, we asked Marianna Hunt, personal finance specialist and associate director at Fidelity International, to bring more clarity and how to behave before the planned changes that will come into effect from April 2029.
The definition
Salary sacrifice is an agreement between an employee and their employer to give up part of their cash pay in exchange for a benefit, most often a workplace pension contribution but also things like a cycle-to-work scheme or car leasing. Because the sacrificed amount never appears as taxable pay, neither the employee nor the employer pays national insurance (NI) on it. Some employers pass their NI saving directly into the employee's pension.
That is the difference from the standard way of paying into a workplace pension: in the standard route, income tax and NI are deducted first, then the pension contribution is made and income tax relief is applied.
“With salary sacrifice, the money goes in before either deduction,” Hunt said. “The NI saving is the bit the standard route doesn't give you.”
Who sets up salary sacrifice and can anyone ask for it?
Employers choose whether to offer salary sacrifice. Not all do – smaller businesses in particular may find the admin and compliance costs off-putting. But Hunt said employees can make the case.
"I would say if you're interested in salary sacrifice and you know that your company doesn't offer it, it is definitely worth having that conversation," she said.
Workers can use salary sacrifice for a pension and a cycle-to-work scheme at the same time, if their employer offers both. The employer decides which benefits are available through the scheme; the employee picks from that list.
The income cliff edges
Where salary sacrifice really earns its keep is at specific salary thresholds. Earners approaching £100,000 start losing their personal allowance. Those above £60,000 lose child benefit. Anyone whose pay sits just above the higher-rate tax threshold pays 40% on the margin. Using salary sacrifice to bring an on-paper salary below any of these thresholds restores the allowance or benefit, and the saving can be substantial.
Someone earning £105,000 who sacrifices £10,000 into their pension drops to a declared salary of £95,000 – below the threshold at which the personal allowance tapers. The £10,000 goes in before tax or NI. At lower salary levels the NI saving alone is smaller but still exists.
What to watch out for
Salary sacrifice does have trade-offs, as “you are literally reducing your headline salary on paper”, said Hunt.
Maternity and paternity pay can be affected in some cases. Life insurance policies tied to salary may be calculated on the lower figure. And mortgage lenders vary: some will use the post-sacrifice salary when assessing how much to lend, which could reduce borrowing capacity for anyone trying to maximise a loan.
"It's probably only if you're looking to borrow at the very top end of your salary" that it makes a material difference, Hunt said, advising speaking to lenders to find out their specific policy before pausing contributions. Stopping salary sacrifice to improve a mortgage application may not be necessary.
What changes in 2029
The government has legislated a cap to the scheme, coming in April 2029: employer pension contributions made through salary sacrifice will only be exempt from NI up to £2,000 a year – anything above that will attract both employer and employee NI.
For many workers the cap will not bite at all. A 40-year-old earning £40,000 and contributing 5% through salary sacrifice is putting in exactly £2,000 a year, right at the threshold. At 10%, the same salary produces a £4,000 contribution, with £2,000 of it exposed to NI from 2029 onwards. Higher earners contributing larger percentages will feel it most.
Hunt points out that the income tax relief on pension contributions is unaffected by the cap: "Even if you lose the national insurance benefit on some of the amount you're putting in, there's still really generous income tax relief that you get from putting money into a pension."
For higher and additional rate taxpayers that relief remains substantial.
Other experts were more perplexed. Rachel Vahey, head of public policy at AJ Bell, said: "This feels a counterintuitive move, given the government's supposed mission to galvanise the nation into saving for their financial futures. Many may instead feel it sends a signal that pension tax advantages are politically up for grabs."
Some employers are already reconsidering their schemes. Standard Life polling of 500 business leaders found that 39% of those currently offering salary sacrifice are less likely to keep it in future; one in ten say they have already decided to withdraw.
Against a backdrop of 15 million people already heading for financial insecurity in retirement, according to the Standard Life Centre for the Future of Retirement, the timing is awkward.
The direct cost to lower earners is modest – someone on £35,000 sacrificing 8% would face around £64 more in NI per year under the new rules. But Standard Life's Catherine Foot warned that the indirect risk is greater.
"A lower earner is most likely to be indirectly affected by the knock-on consequences that this has for businesses," she said.
If an employer withdraws its salary sacrifice scheme entirely – as one in 10 say they already plan to do – lower-paid workers lose access to the benefit altogether, along with any employer match above the auto-enrolment minimum. That is a harder loss to absorb than a modest NI charge.
If you're already signed up
For anyone who has been contributing through salary sacrifice for years without looking closely at how it works, Hunt's advice is to review their full tax position.
"If you're one of those people at those income tax cliff edges, you could maybe use a bit more salary sacrifice – just have a think about your full tax position and whether it makes sense."
The first step is simply checking whether the employer offers it and which benefits are available. The second is working out where your salary sits relative to the key thresholds. The third – 2029 is still three years away – is making the most of the current rules while they stand.
The legislation has passed but its longevity is not guaranteed. The House of Lords made a determined effort to soften the blow by pushing for a higher cap of £5,000; the Commons rejected it. A future government could yet repeal the rules and return employers and employees to the current position.