01 · The arrangement
Your employer changes cash salary into a benefit
Salary sacrifice is a contractual agreement. You give up part of your gross cash pay before you become entitled to it, and your employer provides a benefit instead. For a pension arrangement, the employer pays the exchanged amount into your pension.
It is not simply a deduction made after you have been paid. Your employer must offer the arrangement and explain how pension contributions and other pay-linked benefits are calculated.
02 · Why take-home changes
Current pension sacrifice can save National Insurance
Both salary sacrifice and a net-pay pension can reduce Income Tax. Under current 2026/27 rules, pension salary sacrifice can also reduce the pay used for employee National Insurance.
03 · Before agreeing
Check what your employer bases on salary
Ask whether pension contributions, overtime, bonuses, life cover, statutory pay and other workplace benefits use your original notional salary or your reduced cash salary. A lower contractual salary may also be relevant when demonstrating income to a lender.
Salary sacrifice cannot reduce cash earnings below the applicable National Minimum Wage. Scheme rules also decide whether your employer shares any of its own National Insurance saving.
04 · From April 2029
The National Insurance treatment is due to change
The government has announced that from April 2029 only the first £2,000 of employee pension contributions made through salary sacrifice each year will remain exempt from National Insurance. Contributions can continue above that amount, but the excess is due to attract employee and employer National Insurance.
This does not change the 2026/27 calculation shown by Actual Salary. HMRC has said further guidance will follow before the reform begins.
05 · Official sources