Salary sacrifice arrangements have been about for many years and, although they have been tightened up, the ability to sacrifice salary in exchange for your employer making a pension contribution on your behalf has previously been preserved.

So, what’s the benefit – well, pension contributions benefit from income tax relief, but not national insurance contributions. If an employee makes a pension contribution out of their net pay, they will benefit from income tax relief (basic rate relief being claimed by the pension scheme, higher rate relief being claimed by the employee) but there is no ability to claim back the national insurance suffered by the employee or the employer.

A salary sacrifice arrangement works by an employee giving up the right to an element of their gross pay with their employer agreeing to make an additional pension contribution on their behalf – the employee saves national insurance (because their gross pay is reduced) and the employer generally shares their national insurance saving with the employee too, meaning they are no worse off but the contributions to the employee’s pension scheme is increased.

It is proposed that this benefit will be capped – although employees will still be able to enter into salary sacrifice arrangements in respect of pension contributions, the national insurance saving will only apply to the first £2,000 each year. Any amount above this level which is sacrificed will be subject to national insurance contributions on both the employee and the employer. This change is due to come into effect from 6 April 2029.

Things could be worse when it comes to pensions – there had been speculation over reducing the income tax relief available or removing the ability to withdraw a tax-free lump sum… neither came to life this time.

If you would like to discuss this in further detail, please get in touch with your usual contact or e-mail us at experts@tacs.co.uk.