Salary sacrifice can be an efficient way to boost your pension and cut your tax bill. It involves agreeing to exchange part of your gross salary for a non-cash benefit, such as payments into a pension scheme. Because your gross salary is lower, less of your income is subject to Income Tax and National Insurance, reducing your tax bill. Your employer also ends up paying less National Insurance.
How National Insurance is charged
National Insurance is charged at 8% on earnings between £12,570 and £50,270, dropping to 2% on earnings above that. Reducing your income can also help keep you below various thresholds, which can preserve entitlement to things like Child Benefit, according to Helen Morrissey, head of retirement analysis at Hargreaves Lansdown. She added: "Just check it doesn’t impact other benefits, like maternity or sick pay."
Rules changing from April 2029
However, the rules for salary sacrifice are changing from April 2029. From this date, only the first £2,000 of annual employee pension salary sacrifice will be exempt from National Insurance. Contributions above this amount will be subject to National Insurance, although they will still remain free from Income Tax.
Ms Morrissey said: "You’ve still got more than two and a half years to make the most of the system as it currently stands. And even after these changes, pensions remain a hugely effective way to save for your future."
Potential savings and employer impact
Analysis by Hargreaves Lansdown shows someone earning £35,000 a year who sacrifices 10% of their salary into a pension would save £700 a year in Income Tax and £280 in National Insurance. Someone earning £50,000 per year sacrificing 10% of salary into a pension would cut their Income Tax bill by £1,000 a year and save £400 in National Insurance.
Most people have an annual allowance of £60,000 for how much they can pay into their pension before they pay tax on the excess amount. Your allowance might be lower if you have a high income or have already flexibly accessed your pension pot.
Earlier this year, research from the Standard Life Centre for the Future of Retirement showed two in five (39%) business leaders who currently offer salary sacrifice schemes say they are less likely to provide them in future. One in ten (11%) employers said they have already decided to withdraw the scheme completely. However, the Treasury said it does not expect significant numbers of employers to stop offering salary sacrifice.
