Salary sacrifice: What the 2029 changes mean for you

Salary sacrifice has long been a popular way to save for retirement while also reducing income tax and National Insurance (NI). With new rules coming in April 2029, it’s a good time to understand how it works, what’s changing and what it means for you. 

Here’s everything you need to know.

What is salary sacrifice?

Salary sacrifice is an agreement between you and your employer where you give up part of your salary in return for a non-cash benefit – most commonly, employer pension contributions.

Because the sacrificed amount is deducted before tax and National Insurance are calculated, you pay less tax and National Insurance and your employer saves National Insurance too. Many employers pass some of these savings back to you as additional pension contributions.

How do I know if I’m in a salary sacrifice scheme?

If you’re in a salary sacrifice arrangement, it might be specified in your employment contract. You might also be able to work it out from your payslip. Common signs include:

• Your gross pay is lower than your contractual salary.

• Pension contributions appear as employer contributions only.

If you’re unsure, ask your HR or payroll department.

What changes are coming in April 2029?

Currently, there is no cap on the amount of salary that you can sacrifice into pensions before National Insurance applies¹. But from 6 April 2029, only the first £2,000 of salary sacrificed each tax year will be free from NI. Any amount above £2,000 will attract National Insurance: 8% on earnings below the higher-rate tax threshold of £50,270 and 2% on earnings above this. 

What does this mean for employees?

The new rules mean that some employees will see a reduction in their take-home pay in the 2029-30 tax year. The impact will depend on your salary and how much you sacrifice into your pension, but for most people it is likely to be minimal.

For example, if your salary is £40,000 or less and you sacrifice 5% (£2,000) into a pension, there will be no change to your take-home pay because you won’t exceed the £2,000 cap. 

For someone on a £50,000 salary who sacrifices 5% (£2,500), the reduction will be just £40 a year, or around £3.30 a month, according to our calculations. Even if they sacrifice 10% (£5,000), the reduction will be only £240 a year, or £20 a month². Meanwhile, someone earning £80,000 who sacrifices 10% will see a reduction of £120 a year, or £10 a month. For many people, this may not feel like a noticeable difference. 

Do I need to take any action?

It's important not to make any knee-jerk decisions, such as lowering your pension contributions. Reducing what you save today could leave you with less money in retirement. It could also mean a bigger hit to your payslip because you would pay income tax on the portion of salary you’re no longer sacrificing. 

The main thing to watch is whether your employer makes any changes to the pension scheme as a result of the changes. Employers will also pay more National Insurance from April 2029, and some may choose to adjust their pension contributions accordingly.

Is salary sacrifice still a good way to save for retirement?

Yes. Despite the upcoming changes, salary sacrifice remains one of the best ways to save for retirement. Some of the benefits include:

• Tax relief on contributions: your pension contributions are deducted from your salary before tax is applied, which means you automatically receive tax relief at your highest rate of income tax.

• Employer contributions: most employers contribute at least 3% of your earnings, often more³. Some will increase their contributions if you also pay in more.

• Tax-free growth: investments inside a pension grow free from tax.

• Tax-free cash: when you retire, you can take up to 25% of your pensions as tax-free cash (capped at £268,275 over your lifetime).

In addition to workplace pensions, there are other ways to save for retirement. For example, a self-invested personal pension (SIPP), such as the one offered by Vanguard, also offers tax relief but it works differently. Your pension provider claims the tax back from the government at the basic rate of 20% and adds it to your pension pot. If you’re a higher-rate (40%) or additional-rate (45%) taxpayer, you can claim extra tax relief through a tax return. A SIPP also offers tax-free growth, but unless you have a specific arrangement in place with your employer, you won’t get employer contributions.

Key takeaway

While the 2029 changes reduce some National Insurance savings, salary sacrifice remains an effective and tax-efficient way to save for retirement. Many employees won’t be affected at all and for those who are, the impact may feel negligible – often just a few pounds a month. But those few pounds staying inside your pension can make a meaningful difference over time, helping your pot grow and ultimately boosting your financial security. The long-term advantages of saving into a pension far outweigh any small reduction in take-home pay.

¹ Salary sacrifice can’t reduce your salary to below the national minimum wage.

² Source: Vanguard calculations, January 2026. Based on current income tax and National Insurance thresholds.

³ Under auto-enrolment, the minimum pension contribution for the tax year 2025-26 is 8% of your salary between £6,420 and £50,270. The 8% comprises 5% from you (including tax relief) and 3% from your employer.

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