Is salary sacrifice still worthwhile?

Since the changes to pensions salary sacrifice schemes were announced in the November 2025 Budget, reward leaders now have an excellent opportunity to review how salary sacrifice can enhance employee benefits strategies, deliver cost savings and support employee financial wellbeing.

Pension salary sacrifice - also known as salary exchange or Smart pension - is an agreement between an employee and employer where the employee reduces their taxable income in exchange for an increased employer pension contribution of the same amount.

The result is no income tax or National Insurance (NI) on the sacrificed amount – giving savings to both the employer and employee.

It’s a topic that has been in the spotlight since the November 2025 Budget.

If an employee with an average salary of £38,116 contributes 5% of their pay to their pension (or £1,905.80), the annual savings stack up:

Employee NI saving: £152.46
NI savings for employers: £285.87

Multiply that across your workforce and the savings for your organisation can soon add up (assuming average salary as above):

50 employees = £14,293
100 employees = £28,587
500 employees = £142,935
1,000 employees = £285,870

Even if your employees’ salary averages differ, the principle remains: salary sacrifice delivers meaningful savings for both employer and employee.

Some employers choose to share the National Insurance saving with their employees (usually in the form of an increased employer pension contribution), whereas others might choose to use it to offset the cost of other benefits.

Budget update: what’s changing with salary sacrifice?

From 2029, National Insurance savings will apply only to the first £2,000 of sacrificed contributions per year. Contributions above this level will still benefit from income tax savings.

While salary sacrifice still remains valuable in the future, now is the time to maximise the savings before the cap takes effect in 2029.

Pros of salary sacrifice for pension contributions

Boost net pay and increase employee engagement: Employees keep more of their earnings while building their retirement savings – a strong message for financial wellbeing.
Employer savings: NI savings add up quickly, even post-2029. Employees contributing more than £2,000 a year will see NI savings on the first £2,000 contributed each year.
Tax efficiency for high earners: By using salary sacrifice, your higher earning employees can have more money in their pocket and have a pension contribution too. When people have taxable pay above £60,000 or £100,000, the effective marginal tax rate just above those thresholds can be eye watering. Salary sacrifice can be used to reduce taxable income (in exchange for an increased employer pension contribution) to avoid paying the High-Income Child Benefit Charge (threshold is £60,000) or losing the personal allowance, tax free childcare or 30 free hours childcare (threshold for these is £100,000).
Automatic higher-rate tax relief: Salary sacrifice remains a great way for your employees to get the tax relief that they are entitled to, without needing to complete a tax return. This is significant when you consider that many higher rate taxpayers do not claim the higher rate tax relief on pension contributions that they are entitled to (£1.3bn being unclaimed in the five years between 2016/17 and 2020/21).

The cons

While the cost saving benefits of salary sacrifice are enticing, there are a few things you need to consider.

Compliance checks: It is important to ensure that a salary sacrifice agreement doesn’t lower pay below the National Minimum Wage.
Communication matters: Salary sacrifice can sound negative, so it is important to communicate it clearly to ensure maximum uptake. We recommend using the term salary exchange because it is more positive and better reflects how the process works.
Future changes: NI savings are capped from April 2029 so encourage higher employee contributions (where affordable) to maximise the savings over the next three and a half years.

Taking the pros and cons of salary sacrifice for pensions into consideration, here is a simple action plan to get you started:

Understand what the potential savings could be for your organisation. Remember, it is not just high earners. All taxpayers would benefit.
Review payroll systems. Are compliance checks in place for minimum wage calculations?
Communicate clearly and positively with your employees.
Maximise the window. Encourage higher contributions ahead of 2029.
Get advice and support from employee benefits consultants who have experience and expertise in pensions and salary sacrifice arrangements.

Don’t miss out

Salary sacrifice remains one of the most effective ways to boost pension contributions and deliver savings for both employers and employees. With changes on the horizon, now is the time to act to maximise the benefits.

Unlock the savings for your organisation and your people. Get in touch with the experts at Broadstone who can help.