2029 Salary Sacrifice Scheme Overhaul – Will Millions of Workers' Pensions Shrink?
- TBA
- Jan 14
- 4 min read
Friends working in the UK may have heard the term: ‘Salary Sacrifice’.
This concept sounds like it involves a bit of 'sacrifice', but it can actually lower your tax and increase your benefits.
From buying a commuter bicycle or leasing an electric car to saving a lump sum for your pension, and even for childcare, health insurance, or annual gym memberships... salary sacrifice is becoming a key tool for UK professionals to save on tax and improve their quality of life.
However, according to changes announced by the Labour Party in the Autumn Budget, starting from 2029, salary sacrifice pension contributions exceeding £2,000 will begin to attract National Insurance, completely changing the structure of this benefit system.
What is salary sacrifice?
Simply put, salary sacrifice is a contractual agreement between an employee and an employer: the employee agrees to give up a portion of their salary in exchange for a non-cash benefit.
At first glance, it might seem like a loss, but the trick is that the sacrificed portion of the salary is often taken pre-tax, so it is not counted towards taxable income or used to calculate National Insurance.
When taxable income decreases, the tax burden naturally drops. Although the take-home pay decreases, the value of the benefits received is often higher. For many professionals, this is a very 'cost-effective' operation.
The amount and duration of the salary sacrifice depend on the type of benefit.
For example, a company car may require a long-term continuous sacrifice, while an annual bus pass may only require a short-term arrangement.
UK's most important pension tax saving tool 'under the knife'
Among these, pension contributions are the most common and most savings-efficient form of salary sacrifice.
HM Revenue and Customs (HMRC) states that currently about 7.7 million employees pay into their pensions via 'salary sacrifice'. This means employees choose to reduce their pre-tax salary, and the employer pays this portion directly into the pension.
However, according to the new policy proposed by Labour in the 2025 Autumn Budget, from April 2029: the portion of pension contributions made via salary sacrifice that exceeds £2,000 will no longer enjoy National Insurance (NI) tax exemption.
In other words, the former 'tax haven' has been filled in.
Originally, the biggest attraction of salary sacrifice was:
Employees pay less Income Tax and NI
Employers also pay less NI
Employees' pension savings efficiency is higher
Now, these advantages will be significantly weakened.
Who is the typical group affected?
The reform of salary sacrifice means that core employees with greater household financial pressure, mortgages, and childcare responsibilities are most vulnerable to the impact. HMRC analysis shows that currently about 3.3 million people have salary sacrifice pension contributions exceeding £2,000.
Meanwhile, it is expected that the group affected by the new changes is concentrated between the ages of 31 and 50, accounting for 52%, which is far higher than their proportion in the overall workforce (44%); the proportion of men is as high as 59%, exceeding their 50% share of the adult population.
For employers, the portion of salary sacrifice exceeding £2,000 will face higher National Insurance payments, which may prompt companies to reduce the generosity of pension benefits, thereby affecting all employees, not just the 3.3 million directly affected.
At the same time, HMRC data also shows that without adjustment, the cost of National Insurance relief brought by salary sacrifice would increase from £5.8 billion in the 2023–2024 tax year to nearly £8 billion in 2030–2031.
Under financial pressure, the government believes measures must be taken to control costs, but the price is likely to be borne jointly by employees and employers.
Insights from TB Accountants
In the long run, this policy adjustment undoubtedly exacerbates the hidden worries already present in the UK pension system. Population ageing, unstable investment returns, and insufficient per capita savings have made pension savings a point of anxiety for most families.
Salary sacrifice has always been an important tool for UK professionals to 'legally’ save on tax, especially for long-term financial management, healthy living, and family childcare.
However, with policy adjustments, especially the changes to pension-related taxation in 2029, you may need to re-evaluate your salary sacrifice strategy to ensure you maximise returns and avoid potential risks.
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