Pension is where salary sacrifice does its best work. An employee gives up part of their gross pay and it goes into their workplace pension instead, and because that slice is never paid as cash, neither of you pays National Insurance on it. The pension contribution is the same, but it costs less. This page explains exactly how the saving works, what happens to tax relief, how much can be sacrificed, and the one change coming in 2029 that employers should know about. It sits under our wider salary sacrifice service.
This is one scheme within salary sacrifice. For the full picture, including cars and cycle to work, start with our salary sacrifice overview.
What pension salary sacrifice is
In a standard workplace pension, an employee's contribution is taken from their pay after National Insurance has been worked out. In a salary sacrifice pension, the employee agrees to a lower gross salary, and the employer pays the difference straight into the pension. The employee's take-home pay barely moves, the pension receives the same money, but the sacrificed amount never counts as earnings, so National Insurance is not charged on it.
It is the same underlying arrangement as any salary sacrifice: a genuine reduction in contractual pay in return for a benefit. Pension is simply the benefit that keeps its full tax and National Insurance advantage, which is why it is by far the most common scheme we set up. It also fits neatly withauto-enrolment, because the pension it feeds is usually the same workplace scheme.
How the National Insurance saving works
The saving lands on both sides. The employee stops paying employee National Insurance on the sacrificed pay, and the employer stops paying employer National Insurance on it. Across a whole workforce the employer saving adds up, and a lot of employers choose to pay some or all of it into staff pensions, which makes the scheme more generous at little or no extra cost to the business.
Want the figures for a real salary? Our salary sacrifice calculator estimates the take-home effect and the National Insurance saved for a given sacrifice.
What happens to your tax relief
This is the question that worries people most, and the answer is reassuring. You do not lose your tax relief, but you get it a different way. With ordinary contributions the pension scheme or HMRC adds relief on top of what you pay. With salary sacrifice the contribution comes out of gross pay before income tax is calculated, so the tax advantage is already built in and there is nothing separate to claim. The end result is at least as good, and the National Insurance saving sits on top of it. Higher-rate taxpayers who would normally have to claim extra relief through self assessment often find sacrifice simpler, because the full relief happens automatically.
How much you can sacrifice
Two limits decide how much can go in:
- The annual allowance. Total pension contributions in a tax year are capped, currently at £60,000 for most people. It is lower for very high earners whose allowance is tapered, and much lower for anyone who has already flexibly accessed a pension.
- The minimum wage floor. Sacrifice cannot take an employee's cash pay below the National Minimum Wage or National Living Wage, because those are measured on the reduced pay. For lower-paid staff a large sacrifice may simply not be possible.
We check both before we set an amount, and we keep the minimum wage check running every pay period as hours and rates change.
What to watch for
Salary sacrifice reduces gross pay, and a few things are calculated from gross pay, so they deserve a look before you start:
- Statutory pay. Maternity, paternity and sick pay are based on average earnings, so sacrificing in a qualifying period can reduce them. This matters most for anyone who may soon take family leave.
- Mortgages and borrowing. A lower gross salary can affect how much a lender will offer, so employees planning to borrow should know the trade-off.
- Other pension effects. Depending on the scheme, sacrifice can change the earnings figure contributions are based on, which we handle so the amounts stay right.
The change coming in April 2029
At the Autumn Budget 2025 the government announced that, from April 2029, pension contributions made through salary sacrifice above a set annual amount will start to attract National Insurance. For most employees on typical contributions the saving continues, but larger sacrifices will be affected, and employers offering generous schemes should plan ahead. We cover what is changing, and what it means for you, on our dedicated salary sacrifice changes from 2029 page.
How we set it up and run it
A salary sacrifice pension rewards being set up carefully and run consistently, which is exactly what a payroll bureau is for. We start by checking the scheme works for your staff, flagging anyone the minimum wage floor rules out and working through the effect on statutory pay. We make sure the contractual variation is in place, then build the sacrifice into your payroll so the reduced salary, the pension contribution and the correct National Insurance treatment are all applied accurately, with a clear payslip.
Each pay period we process the arrangement, upload the contribution to your provider, keep the minimum wage check running, and handle anyone who needs to change or leave their sacrifice. We are a South Wales payroll bureau with more than 60 years of combined experience, CIPP members and Chartered Accountants (ICAEW), ICO registered and Cyber Essentials certified. If you want a salary sacrifice pension set up and run correctly, talk to us about your payroll or see how our pricing works.