Salary Sacrifice Explained: Pensions, Electric Cars and the 2029 NI Cap

How salary sacrifice works

You agree to a lower contractual salary, and your employer provides a benefit worth the same amount. The sacrificed pay never becomes your earnings, so no income tax, employee NI, employer NI or student loan is charged on it. HMRC requires a genuine change to your contract, and sacrifice cannot take your pay below the National Minimum Wage.

Since April 2017 most sacrifice schemes lost their tax advantage. The main exceptions are pensions, childcare vouchers for existing members, cycle to work schemes and ultra-low emission cars (75g/km CO2 or less).

Pension salary sacrifice: worked examples

Basic-rate example: £45,000 salary sacrificing 5% (£2,250). You save 20% tax (£450) and 8% NI (£180). It costs you £1,620 in take-home pay to put £2,250 into your pension. Your employer saves £337.50 of employer NI, which some employers add to your pension.

Higher-rate example: £70,000 sacrificing 10% (£7,000). You save 40% tax (£2,800) and 2% NI (£140), so £7,000 goes into your pension for a £4,060 drop in take-home pay. The employer saves £1,050.

Compared with a normal pension contribution under relief at source or net pay, the extra gain from sacrifice is the NI saving: 8% for basic-rate earners, 2% above £50,270, plus the employer's 15%.

The £2,000 NI cap from April 2029

HM Treasury confirmed on 26 November 2025 that from 6 April 2029, pension contributions made through salary sacrifice above £2,000 a year will be treated as earnings for Class 1 NI. Both employee (primary) and employer (secondary) NI will be due on the excess. Income tax relief on pension contributions is unchanged, and ordinary employer pension contributions that are not funded by sacrifice keep their full NI exemption.

Using the £70,000 example: from 2029/30, £5,000 of the £7,000 sacrifice would attract 2% employee NI (£100) and 15% employer NI (£750). For a basic-rate earner sacrificing £4,000, the excess £2,000 would cost £160 in employee NI. The government estimates about 56% of current sacrifice users making typical contributions will be unaffected. Sacrifice still reduces adjusted net income, so it remains useful for the £100,000 taper and Child Benefit charge.

Primary legislation is still to be passed and HMRC has said details on how the limit operates will follow, so check for updates before 2029.

Electric car salary sacrifice

With an electric car you sacrifice gross pay to cover the lease, and pay benefit-in-kind (BIK) tax on the car's list price. For 2026/27 the BIK rate for zero-emission cars is 4%, rising to 5% in 2027/28, 7% in 2028/29 and 9% in 2029/30.

Example: a £40,000 list-price EV leased via sacrifice at £500 a month (£6,000 a year). A basic-rate taxpayer saves 20% tax and 8% NI, £1,680, so the net cost is £4,320. BIK is £40,000 x 4% = £1,600, taxed at 20% = £320. The true annual cost is £4,640, about £387 a month, usually including insurance and maintenance. A higher-rate taxpayer saves 42% (£2,520) but pays £640 BIK tax, a net £4,120.

Downsides to check

• Lower contractual pay can reduce mortgage affordability, death-in-service and life cover multiples, and some statutory payments.
• Statutory Maternity Pay and other earnings-linked benefits are based on your reduced pay.
• You cannot usually change or exit a scheme mid-year except for a lifestyle change, such as pregnancy or marriage.
• Pay cannot fall below the minimum wage after sacrifice.

Cycle to work schemes

Cycle to work works the same way: you sacrifice gross pay over a hire period, usually 12 months, and save income tax and NI on the cost of the bike and safety equipment. A £1,200 e-bike costs a basic-rate taxpayer about £864 and a higher-rate taxpayer about £696. At the end of the hire you can usually buy the bike for a small fair market value. Unlike pension sacrifice, cycle schemes are not affected by the 2029 cap.

Setting up salary sacrifice: what actually happens

• Your employer offers a scheme and you agree in writing to a lower contractual salary, from a future date. A sacrifice cannot be backdated to pay already earned.
• Your payslip shows the lower gross pay. The pension or benefit is then provided as an employer contribution or a non-cash benefit.
• Check whether your employer passes on some or all of its 15% NI saving. This makes a large difference to the value.
• Ask how the scheme treats pay-linked benefits such as overtime rates, life cover and pay rises. Many employers use a "notional salary" for these so you do not lose out.
• Expect to stay in the arrangement. HMRC's guidance says that if you can swap between cash and the benefit whenever you like, the tax and NI advantages do not apply. Opting in or out is normally tied to a life event such as marriage, divorce or a partner's redundancy or pregnancy.

Higher earners: the threshold effects

Salary sacrifice reduces adjusted net income pound for pound, which makes it valuable at the £60,000 Child Benefit threshold and the £100,000 allowance taper.

On £60,000, sacrificing 10% (£6,000) reduces take-home pay from £45,357.40 to £41,877.40, a cost of £3,480.00 for £6,000 in the pension. On £105,000, sacrificing £5,000 restores £2,500 of personal allowance. Take-home falls by only £1,900.00 for the £5,000 contribution, an effective subsidy of 62%.