Salary sacrifice is changing. Employers need to make sure staff understand what it means
10 Jun 2026
Published in: Member News
Salary sacrifice rules are changing from April 2029. Employers should review contracts, payroll processes and staff communications now so employees understand what is changing and what it means for them.
Salary sacrifice is one of those workplace benefits that many employees use without fully understanding.
For some, it is simply something that appears on their payslip. For others, it is a way to increase pension contributions, access a cycle to work scheme, arrange childcare support or take up a company car benefit.
But recent research suggests there is still a real knowledge gap. Barnett Waddingham found that 62% of UK workers surveyed said they use salary sacrifice, yet many remain unclear about how it works and what it can be used for. One in five believed it could only be used for pension contributions.
That matters even more now because the rules are changing.
The National Insurance Contributions (Employer Pensions Contributions) Act 2026 has now received Royal Assent. From 6 April 2029, only the first £2,000 of employee pension contributions made through salary sacrifice each year will be exempt from National Insurance. Contributions above that amount can still be made, but they will be subject to employee and employer National Insurance.
For employers, this is not just a payroll issue. It is a communication issue, a compliance issue and, potentially, an employee relations issue too.
What is salary sacrifice?
Salary sacrifice is an arrangement where an employee agrees to give up part of their salary in return for a non cash benefit.
That benefit might be pension contributions, childcare support, a cycle to work scheme, a company car arrangement or another approved workplace benefit. The important point is that the employee’s contractual pay changes. They are not simply making a normal deduction from their pay. They are agreeing to exchange part of their salary for something else.
Because of that, salary sacrifice arrangements need to be handled carefully. HMRC guidance confirms that employers need to change the employee’s contract when setting up salary sacrifice, and the contract should be clear about both cash and non cash entitlements.
That is where some employers can run into difficulty. If staff do not understand what they have agreed to, or if documents are unclear, the arrangement can quickly become confusing.
The 2029 change in simple terms
From 6 April 2029, salary sacrifice for pension contributions will still be allowed.
The change is that the National Insurance saving will only apply to the first £2,000 of sacrificed salary each tax year for pension contributions. Anything above that limit will be subject to National Insurance.
This does not mean employees can only contribute £2,000 into their pension through salary sacrifice. It means the National Insurance advantage is capped.
For employees who sacrifice smaller amounts, there may be little or no practical effect. For employees who sacrifice larger amounts, particularly middle income earners, take home pay could reduce. AJ Bell has warned that someone earning between £45,000 and £50,000 could see a bigger impact because of how National Insurance rates apply around that earnings band.
Employers will also need to report the total amount of salary sacrificed through payroll software, with further HMRC guidance expected.
Why employee understanding matters
There is a risk that employees hear “salary sacrifice cap” and assume the whole benefit is being removed.
That is not the case.
However, if the communication is poor, people may opt out, reduce pension saving or make decisions based on half understood information. That could affect retirement planning, financial wellbeing and trust in the employer.
Employers do not need to give financial advice, and they should be careful not to stray into that territory. But they do need to explain workplace arrangements clearly.
That means making sure employees understand:
- What salary sacrifice is.
- Which benefits it applies to in your organisation.
- How it affects contractual pay.
- How it appears on payslips.
- How it may affect take home pay.
- When the 2029 pension change comes in where.
- Employees can go for independent financial advice if they need it.
The clearer the explanation, the less room there is for misunderstanding.
Check your documents before the change arrives
Although the cap does not apply until April 2029, employers should not leave this until the last minute.
Salary sacrifice arrangements usually connect with several areas of HR and payroll documentation, including contracts of employment, pension communications, benefits policies, payroll processes, onboarding documents and employee handbooks.
If those documents are out of date, vague or inconsistent, now is a good time to review them.
Employers should check whether the documentation explains the arrangement properly, whether employees have given clear agreement, and whether the business has a proper process for employees joining, changing or leaving a scheme.
Acas also makes clear that both employer and worker need to agree to salary sacrifice, and that salary sacrifice must not take pay below the National Minimum Wage.
That last point is especially important for lower paid workers. Employers must have checks in place to make sure salary sacrifice does not reduce cash earnings below the relevant minimum wage rate. This should not be left to chance or assumed to be covered by payroll software.
Managers need to understand the basics too
Salary sacrifice is often seen as a finance or payroll matter, but line managers may still be asked questions by employees.
They do not need to be pension experts. They do need to know where to signpost people and what not to say.
A manager who gives a casual answer such as “you’ll be better off doing it” or “it won’t affect anything” could create problems if that turns out not to be right for that employee’s circumstances.
A better approach is to give managers a simple internal guide covering:
- What salary sacrifice means
- Who handles scheme questions internally
- What employees should be directed to read
- When payroll or HR should be involved
- Why managers should not give personal financial advice
This keeps communication consistent and reduces the risk of well meaning but inaccurate advice.
Payroll and HR need to work together
The salary sacrifice changes will need payroll attention, but HR should not sit outside the process.
Payroll will need to manage reporting and calculations. HR will need to make sure contractual documents, policies and employee communications are clear. Finance may also need to understand the impact on employer National Insurance costs.
This is one of those areas where the risk sits between departments. If everyone assumes someone else owns it, the business can end up with unclear documents, confused employees and avoidable payroll issues.
A simple internal review now could save a lot of difficulty later.
What employers should do next
Employers do not need to panic about the 2029 change, but they should start preparing.
The most practical steps are:
- Review existing salary sacrifice arrangements.
- Check contracts and employee communications.
- Make sure payroll processes can identify sacrificed amounts.
- Confirm National Minimum Wage checks are in place.
- Prepare plain English employee guidance.
- Train managers on where to direct questions.
- Plan communications well before April 2029.
The aim is not to turn every employer into a pensions adviser. It is to make sure employees understand the workplace benefit they are using, the choices available to them and the changes that are coming.
Salary sacrifice can still be a valuable benefit. But it works best when employees understand it, employers administer it properly and the paperwork matches what is happening in practice.
For employers, the message is simple: do not wait until the cap arrives. Use the time now to review, clarify and communicate properly. That will put both the business and its employees in a much stronger position.
For further support check out https://www.echumanresources.co.uk/
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