What is salary sacrifice for pensions?

What are salary sacrifice pension contributions?

Salary sacrifice involves giving up part of your salary in return for which your employer pays an equivalent amount into your pension.

Normally speaking, money that goes into your workplace pension is subject to both employee and employer National Insurance contributions.

But with salary sacrifice, because your salary is lower, the amount of National Insurance (and income tax) you pay is reduced, while your pension contributions remain the same. 

Your employer also saves the National Insurance that would have been payable on the portion of your salary that gets directed to your pension. 

• Find out more: other ways you can use salary sacrifice

What’s the maximum I can pay into my pension via salary sacrifice?

There is currently no limit on the amount that you can pay into your pension under salary sacrifice. However, your reduced salary must remain above the minimum wage. 

From April 2029, the amount you can contribute to a workplace pension via salary sacrifice will be capped at £2,000 a year.

You will still be able to pay more than this into your pension, but any contributions above this level will be subject to employer and employee National Insurance. This will be managed by your employer, so you won’t need to contact HMRC.

The standard rate of National Insurance is 8%, but this drops to 2% on income above £50,270.

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Does my employer offer salary sacrifice for pensions?

Salary sacrifice schemes are fairly common across the private sector. 

The other arrangements commonly used to administer pension contributions are known as ‘net pay’ or ‘relief at source.’ These ensure that you benefit from income tax relief on your contributions, but unlike salary sacrifice, they won’t result in any National Insurance savings as well.

With relief at source, contributions are taken from your after-tax pay. The pension provider takes 80% from your salary and claims 20% of the amount you’ve contributed from the government, which is automatically paid into your pension. 

If you’re entitled to more than 20%, you need to claim it yourself. 

With net pay, contributions are taken from your salary before income tax is paid and then the scheme claims back tax relief at the level that you’re entitled to, so you won’t need to claim it yourself. 

If you’re unsure what arrangement applies to you, check with your employer. 

• Find out more: tax relief on pensions explained

Will I be affected by the £2,000 salary sacrifice cap?

It depends how much you earn and how much of your salary you choose to sacrifice. 

For example, if you earn £40,000 and reduce your salary by 5%, you’ll be sacrificing £2,000. As this is within the cap, you won’t pay any extra National Insurance. 

But if you reduce the same salary by 10%, you’ll be sacrificing £4,000 for your pension, which means you’ll have to pay National Insurance on the £2,000 that exceeds the cap. This means you’ll miss out on savings of £160 a year. 

Here’s how much extra National Insurance you could pay as a result of the cap, assuming you sacrifice 5% of your salary. 

The impact on employers will be more significant as they’ll face a higher National Insurance rate of 15% on contributions above the cap.