Salary Sacrifice Pensions 2026/27: NI Savings and the 2029 Cap

Salary sacrifice for pensions is a contractual agreement in which an employee gives up part of their future cash pay and the employer pays the same amount into their pension. Because the sacrificed pay is never paid as salary, neither the employee's nor the employer's Class 1 National Insurance is due on it, which in 2026-27 saves the employer 15% and the employee 8% (or 2% above the upper earnings limit) of every pound sacrificed. That advantage is now time-limited: the National Insurance Contributions (Employer Pensions Contributions) Act 2026 lets the government charge NICs on salary-sacrificed pension contributions above £2,000 a year from the 2029-30 tax year. Here is what to know about pension contributions for UK company owners.

Key takeaways

The saving is National Insurance, not just income tax. Income tax relief on pension contributions is available however they are made; salary sacrifice adds a 15% employer NIC saving and an 8% or 2% employee NIC saving on the sacrificed amount.
It only works if the contract genuinely changes. HMRC expects a prospective variation of the employment terms, evidenced in writing and on payslips. Backdated or "pick and choose" arrangements fail.
Guard-rails matter. Post-sacrifice cash pay must not fall below the National Minimum Wage (£12.71 an hour from April 2026 for workers aged 21 and over), and low pay can affect statutory payments.
Higher earners gain most on income tax. Sacrificed pay reduces adjusted net income, which can restore the personal allowance above £100,000 and reduce or remove the High Income Child Benefit Charge above £60,000.
The 2029 cap is law, the detail is not. The Act received Royal Assent on 29 April 2026 and requires the first regulations to set the limit at £2,000 a year; HMRC has said operational detail will follow in secondary legislation.
US citizens need a separate US analysis. UK relief does not automatically carry onto a US return; the US-UK treaty has a specific pension article, but it has conditions.

How salary sacrifice works

HMRC's Employment Income Manual defines the arrangement plainly: a salary sacrifice happens when an employee gives up the right to part of the cash pay due under their contract of employment, usually in return for a non-cash benefit (EIM42750). For pensions, the non-cash benefit is an employer contribution to a registered pension scheme.

The mechanics are simple. An employee on £45,000 who agrees to sacrifice £2,250 becomes, contractually, an employee on £42,750 plus an employer pension contribution of £2,250. Payroll runs on £42,750. Income tax and both sides of Class 1 NIC are calculated on the lower figure, and the £2,250 goes into the pension as an employer contribution.

Why pensions still qualify after OpRA

Since 6 April 2017, most benefits provided through salary sacrifice fall within the optional remuneration arrangement (OpRA) rules, which tax the benefit by reference to the salary given up. Contributions to registered pension schemes are excluded from those rules, which is why pension salary sacrifice has kept its advantage when most other sacrifice schemes lost theirs (EIM42750). HMRC's employer guidance also confirms that registered pension contributions made this way do not need to be valued or reported as a benefit (Salary sacrifice for employers).

What HMRC looks for

HMRC's guidance for employers sets out what makes an arrangement effective (gov.uk):

A real change to contractual entitlement. The contract must be clear on the employee's cash and non-cash entitlements at any given time.
Prospective, not retrospective. The variation applies to pay not yet earned. By the same principle, a bonus sacrifice needs to be agreed before the employee becomes entitled to the bonus.
Evidence. HMRC expects to see the documented variation of terms and payslips before and after it.
Limited switching. Employees should not be able to move in and out at will. HMRC accepts changes on lifestyle events such as marriage, divorce, redundancy or pregnancy.

The detailed technical pages sit in the manual from EIM42750 onwards.

2026-27 National Insurance rates and thresholds

The saving depends on where the sacrificed pay sits within the NIC bands. HMRC's published figures for 2026-27 are (Rates and thresholds for employers 2026 to 2027):

|---|---|---|---|

| Lower earnings limit | £6,708 | £559 | £129 |

| Secondary threshold (employer NIC starts) | £5,000 | £417 | £96 |

| Primary threshold (employee NIC starts) | £12,570 | £1,048 | £242 |

| Upper earnings limit | £50,270 | £4,189 | £967 |

| Employer rate above secondary threshold | 15% | | |

| Employee rate, primary threshold to UEL | 8% | | |

| Employee rate above UEL | 2% | | |

Different employer rates apply to some categories, such as employees under 21, apprentices under 25, veterans and Freeport or Investment Zone employees, so check the category letter before assuming a 15% saving.

Worked example: basic-rate employee

Assume an employee in England on £45,000 who sacrifices 5% of salary (£2,250) in 2026-27. All of the sacrificed pay sits between the primary threshold and the upper earnings limit, and above the employer's secondary threshold.

| | Net pay arrangement (no sacrifice) | Salary sacrifice |

|---|---|---|

| Contractual salary | £45,000 | £42,750 |

| Amount into pension | £2,250 | £2,250 |

| Income tax saved (20%) | £450 | £450 |

| Employee NIC saved (8%) | £0 | £180 |

| Fall in take-home pay | £1,800 | £1,620 |

| Employer NIC saved (15%) | £0 | £337.50 |

The income tax relief is the same either way. Salary sacrifice adds £180 a year for the employee and £337.50 a year for the employer. If the employer chooses to add its NIC saving to the pension, the pot receives £2,587.50 for the same £1,620 reduction in take-home pay. Note that £2,250 is £250 above the £2,000 limit that applies from 2029 (see below). We take a closer look at the Employment Allowance and small-employer NIC relief.

Worked example: employee earning £110,000

Now assume an employee in England on £110,000 who sacrifices £10,000.

Employee NIC saved: the sacrificed pay is all above the upper earnings limit, so the saving is 2% of £10,000, or £200.
Employer NIC saved: 15% of £10,000, or £1,500.
Income tax saved: the personal allowance falls by £1 for every £2 of adjusted net income above £100,000 and is nil at £125,140 (gov.uk). At £110,000 the allowance is £7,570 and taxable income is £102,430. After the sacrifice, adjusted net income is £100,000, the full £12,570 allowance returns, and taxable income is £87,430. That £15,000 reduction is taxed at the 40% higher rate (Income Tax rates), so the income tax saving is £6,000.

The employee puts £10,000 into their pension for a take-home reduction of £3,800. Personal contributions also reduce adjusted net income, so the allowance restoration is not unique to salary sacrifice; the NIC savings are. Scottish taxpayers pay different income tax rates, so the income tax figures differ for them.

The £2,000 cap from April 2029

At the Autumn Budget on 26 November 2025, the government announced that from April 2029 only the first £2,000 a year of employee pension contributions made through salary sacrifice will be exempt from NICs, and that employees as well as employers will pay NICs on the excess (Changes to salary sacrifice for pensions from April 2029). Contributions above the limit remain free of income tax, subject to the usual pension limits, and employer pension contributions that are not made through salary sacrifice stay free of NICs. Our guide to what the 2026 UK Budget means for US citizens covers this in full.

This is no longer only an announcement. The National Insurance Contributions (Employer Pensions Contributions) Act 2026 received Royal Assent on 29 April 2026. It works by giving the government power to make regulations treating salary sacrificed for pension contributions as earnings for NIC purposes. It says the first regulations must set the contributions limit at £2,000 for a tax year, and the changes apply for 2029-30 and later years. HMRC's policy paper gives the start date as 6 April 2029 and says that details of the design and operation of the limit will be set out in secondary legislation (HMRC policy paper). Points such as how the limit applies to people with more than one employer are for those regulations, so check the latest HMRC guidance before building payroll logic.

What the cap might mean in money terms

Future NIC rates are not known. At 2026-27 rates, purely as an illustration:

The £45,000 employee above sacrifices £250 more than the cap. The excess would cost the employer £37.50 and the employee £20 a year.
The £110,000 employee sacrifices £8,000 more than the cap. The excess would cost the employer £1,200 and the employee £160 a year.

For most basic-rate employees on standard contribution levels the change is small. For senior staff and bonus sacrifice schemes it removes most of the employer's NIC saving. The government's own estimate is that around 56% of employees currently using salary sacrifice for pensions are fully within the £2,000 limit (HM Treasury).

Guard-rails: minimum wage, statutory pay and auto-enrolment

National Minimum Wage

HMRC is explicit that a salary sacrifice arrangement must not reduce an employee's cash earnings below National Minimum Wage rates (gov.uk). From April 2026 the hourly rates are £12.71 for those aged 21 and over, £10.85 for ages 18 to 20, and £8 for under-18s and apprentices (National Minimum Wage rates). Build a payroll check that tests post-sacrifice pay against the relevant rate for every pay reference period, and cap or suspend the sacrifice where needed.

Statutory payments

If a salary sacrifice arrangement reduces an employee's average weekly earnings below the lower earnings limit (£129 a week in 2026-27), the employer does not have to pay statutory payments such as Statutory Maternity Pay or Statutory Sick Pay (gov.uk). That is a real risk for part-time and low-paid staff and belongs in the employee communication.

Auto-enrolment qualifying earnings

For 2026-27 the automatic enrolment earnings trigger remains £10,000 and the qualifying earnings band remains £6,240 to £50,270 (DWP review for 2026/27). The statutory minimum is 8% of qualifying earnings in total, of which at least 3% must come from the employer (Workplace pensions).

Two practical points from The Pensions Regulator's guidance. First, active membership of the scheme cannot depend on the employee agreeing to salary sacrifice; an employee who declines must still be enrolled with contributions deducted another way. Second, for a defined contribution scheme, qualifying earnings for the minimum contribution test are measured on the post-sacrifice salary, so check the minimum is still met after the sacrifice (TPR detailed guidance). Our guide to pensions auto-enrolment for UK employers covers the wider duties.

Personal allowance taper and child benefit charge

Salary sacrifice reduces gross pay, and therefore adjusted net income, before any claim is made. That is why it interacts so strongly with two income-based cliffs:

£100,000 personal allowance taper. The allowance falls by £1 for every £2 above £100,000 and is nil at £125,140, creating an effective 60% income tax rate on income in that band for England, Wales and Northern Ireland taxpayers (gov.uk).
High Income Child Benefit Charge. From 2024-25 onwards the charge starts when adjusted net income exceeds £60,000, at 1% of the Child Benefit for every £200 above it, and equals the full Child Benefit at £80,000 (gov.uk). An employee on £65,000 who sacrifices £5,000 brings adjusted net income to £60,000 and removes the charge entirely.

The annual allowance still applies. Salary-sacrificed contributions are employer contributions and count towards the £60,000 annual allowance, which is tapered for those with threshold income over £200,000 and adjusted income over £260,000 (Annual allowance).

Setting up a scheme: step by step

1. Model the numbers for each pay band, including employees under 21, apprentices and anyone near the National Minimum Wage or the lower earnings limit. Our UK tax calculator is a quick starting point for individual cases.

2. Decide the employer's policy on the NIC saving: keep it, share it, or pay it into employees' pensions.

3. Confirm pension scheme rules allow salary sacrifice and that contributions will be paid as employer contributions.

4. Draft the contractual variation and an opt-in form, with clear rules on when employees can change their election.

5. Brief employees in writing before they choose (see the next section).

6. Configure payroll: reduced contractual pay, employer pension contribution, NMW test per pay period, and any "reference salary" used for pay rises, overtime or life cover.

7. Keep evidence: signed variations and payslips before and after the change.

8. Plan for 2029: identify employees likely to exceed £2,000 a year, especially through bonus sacrifice, and budget for the lost NIC saving.

If you want this handled end to end, our payroll and people service covers set-up, payroll configuration and ongoing checks.

What to put in the employee communication

A fair, well-evidenced explanation protects both sides. It should cover:

What changes: the new contractual salary, the employer pension contribution, and that the employee is agreeing to vary their contract.
Illustrative figures for their own pay: take-home before and after, and the amount going into the pension.
What else may be based on the lower salary: statutory payments, some state benefits, mortgage or credit applications, and any employer benefits linked to salary unless a reference salary is used.
Minimum wage and statutory pay protection, and what happens if pay falls near those levels.
When they can opt out or change, including lifestyle events.
Whether the employer shares its NIC saving.
The 2029 change, stated as enacted law with the operational detail to follow.
That this is not personal financial advice, and where to get independent advice.

Common mistakes

Backdating. A sacrifice agreed after the pay or bonus is already due is not effective.
No contractual paper trail. Changing payroll without varying the contract leaves the arrangement open to challenge.
Ignoring the minimum wage check on low-paid or variable-hours staff.
Letting employees switch at will, outside lifestyle events.
Assuming a 15% saving for every employee, when some categories carry a 0% employer rate up to the upper secondary threshold.
Forgetting the annual allowance on large bonus sacrifices.
Making enrolment conditional on accepting salary sacrifice.
Treating US citizen employees like everyone else (see below).

If the employee is a US citizen

The United States taxes its citizens on worldwide income wherever they live, so a US citizen working in the UK files a US return as well as dealing with UK tax. UK income tax and NIC relief for a salary sacrifice does not automatically carry onto that US return.

The US-UK income tax treaty contains a specific rule. Under Article 18(5), where a US citizen resident in the UK is employed in the UK by a UK-resident employer and belongs to a UK pension scheme, contributions attributable to that employment can be deductible or excludable for US tax purposes, and employer contributions need not be treated as taxable income (US-UK treaty text, US Treasury). There are conditions:

It applies only to the extent the contributions qualify for UK tax relief.
The US relief cannot exceed what the US would allow its own residents for a generally corresponding US scheme.
It applies only where the US competent authority has agreed the scheme generally corresponds to a US scheme.
Contributions relieved this way are treated as contributions to a corresponding US scheme when testing eligibility for US plan benefits.

How a salary sacrifice amount is characterised for these limits, and how it interacts with any US retirement accounts the employee holds, depends on the individual facts. Our guide to US tax on UK pensions and SIPPs explains the wider picture, and a US-UK expat tax accountant should review the position before the employee files.

When to get professional help

Salary sacrifice is straightforward for a small team on standard contributions, but the risks rise with low-paid staff, bonus sacrifice, higher earners near the £100,000 taper, the 2029 cap and US citizen employees. At Next Tax Source, an ACCA-qualified accountant reviews and signs off UK payroll and tax work, and an IRS Enrolled Agent reviews and signs off US returns. If you would like a second pair of eyes on your scheme design or employee pack, book a consultation.

This article is general information, not advice for your circumstances.

Sources

Frequently asked questions

How much does salary sacrifice save an employer in 2026-27?+

For most employees, the employer saves Class 1 secondary National Insurance at 15% on every pound of salary sacrificed above the £5,000 secondary threshold. On a £2,250 sacrifice that is £337.50 a year. Some categories, such as employees under 21, apprentices under 25 and veterans, already carry a 0% employer rate up to the upper secondary threshold, so the saving for them may be nil. Employers can keep the saving, share it or add it to employees' pensions.

How much does salary sacrifice save an employee?+

The employee gets income tax relief at their marginal rate, which is also available through other contribution methods, plus a National Insurance saving that only salary sacrifice provides. In 2026-27 that NIC saving is 8% on sacrificed pay between £12,570 and £50,270 and 2% above £50,270. A basic-rate employee in England sacrificing £2,250 saves £450 income tax and £180 NIC, so take-home pay falls by £1,620 for £2,250 paid into the pension.

What is the salary sacrifice NIC cap from April 2029?+

The National Insurance Contributions (Employer Pensions Contributions) Act 2026, which received Royal Assent on 29 April 2026, allows NICs to be charged on salary-sacrificed pension contributions above a limit. The first regulations must set that limit at £2,000 a year, and the change applies from the 2029-30 tax year, starting 6 April 2029. Both employer and employee NICs will be due on the excess. Income tax relief on the contributions is unaffected, and detailed rules will follow in secondary legislation.

Is the 2029 salary sacrifice cap announced or enacted?+

It is enacted. It was announced at the Autumn Budget on 26 November 2025 and the enabling Act received Royal Assent on 29 April 2026. The Act gives the government power to make regulations and fixes £2,000 as the limit in the first regulations. HMRC has said the design and operation, including reporting, will be set out in secondary legislation, so employers should check for those regulations before finalising payroll changes for 2029-30.

Can salary sacrifice take someone below the National Minimum Wage?+

No. HMRC's guidance says a salary sacrifice arrangement must not reduce an employee's cash earnings below the National Minimum Wage. From April 2026 the rates are £12.71 an hour for workers aged 21 and over, £10.85 for ages 18 to 20 and £8 for under-18s and apprentices. Employers should test post-sacrifice pay against the correct rate in every pay reference period and reduce or pause the sacrifice where it would breach the minimum.

Does salary sacrifice help with the High Income Child Benefit Charge and the £100,000 taper?+

Yes. Sacrificed pay is never paid as salary, so it reduces adjusted net income. The High Income Child Benefit Charge starts above £60,000 and equals the full benefit at £80,000, so an employee on £65,000 sacrificing £5,000 can remove the charge. Above £100,000 the personal allowance falls by £1 for every £2 of income until it is nil at £125,140, so sacrifice can restore some or all of the allowance.

Can salary sacrifice affect maternity pay or other statutory payments?+

It can. HMRC's guidance says that if a salary sacrifice reduces an employee's average weekly earnings below the lower earnings limit, the employer does not have to pay statutory payments. In 2026-27 the lower earnings limit is £129 a week. This mainly affects part-time and lower-paid staff, so it should be explained in the employee communication, and payroll should flag anyone whose post-sacrifice earnings approach that level.

Does UK salary sacrifice relief apply on a US citizen's US tax return?+

Not automatically. The US taxes citizens on worldwide income, and UK relief does not carry across by itself. Article 18(5) of the US-UK tax treaty can allow a US citizen resident and employed in the UK to exclude contributions to a UK scheme, but only to the extent they qualify for UK relief, only up to what the US would allow for a corresponding US plan, and only if the US competent authority agrees the scheme corresponds. A US tax professional should review the position.