Salary sacrifice explained for limited companies: what’s changing in 2029?

Salary sacrifice is something many employees could be taking advantage of to lower their tax liability, but, through lack of knowledge or sheer hesitation, they’re missing out on the benefits.

In this article, we explain what salary sacrifice is and what it means to small company employers.

We’ll also explore the key advantages and disadvantages of salary sacrifice so you can make a more informed decision as a salaried employee.

Scroll down for important changes announced at Autumn Budget 2025.

What is a salary sacrifice?

As the name suggests, salary sacrifice is when an employee agrees with their employer to relinquish a portion of their salary in exchange for a non-monetary benefit.

This must be agreed to in writing by the employee and the employer.

Some of the most common non-cash benefits that motivate somebody to make a salary sacrifice are:

• Further employer pension contributions
• Company car
• Childcare vouchers or provision
• On-site parking
• Cycle-to-work scheme
• Training opportunities
• Additional annual leave

If you are a full-time employee with additional earnings as a sole trader, we recommend speaking to an accountant, as you need to consider your overall income before deciding whether salary sacrifice is tax-efficient for you.

Salary sacrifice is only available to employees

Salary sacrifice arrangements are only available to employees who receive pay through PAYE.

They cannot be used by sole traders, partners in a partnership, or anyone paid purely on a self-employed basis, as there is no employment contract against which salary can be contractually reduced.

This means salary sacrifice is relevant mainly to limited companies with employees, including director-shareholders who are on the payroll.

Even then, any sacrifice must be agreed in advance and properly documented, and it must not reduce earnings below the National Minimum Wage.

For sole traders, there are alternative tax-efficient planning options, but salary sacrifice is not one of them.

Do you have to pay tax on salary sacrifice?

When a salary sacrifice scheme is in place, employees must pay the regular tax and National Insurance on their salaried income.

If the person is also receiving a non-cash benefit in exchange for a portion of their salary, they’ll normally still need to pay tax and NI on the value of this benefit.

Most non-cash benefits won’t be recorded on a payslip and must be reported to HMRC as a benefit in kind using a P11D form.

However, there are some exceptions to this rule, such as:

• Pension scheme payments and/or pension advice provided by the employer
• Childcare vouchers (including those provided directly by the employer pre-October 2018)
• Cycle to work schemes
• Workplace nursery provisions

The advantages of a salary sacrifice for employees

There are two main benefits of taking a salary sacrifice, the first and most obvious being:

Access to benefits you don’t have to tangibly ‘pay’ for

The nature of a salary sacrifice means that a person is not having to take things like additional employee pension contributions, workplace parking, or some childcare costs out of their ‘take home’ pay.

Of course, the employee is paying for the benefit in a roundabout way, but the amount is already deducted in exchange for the non-monetary benefit, making it much clearer and easier to budget the income they bring home each month.

Lower tax and National Insurance contributions to pay

Some benefits, such as pensions, are tax-free, so opting to take a salary sacrifice in exchange for some benefits means you won’t pay as much tax and NI.

Things to weigh up

Although there are many benefits to salary sacrifice, there are also downsides that should be considered before making a decision.

Consequences of lower income

Salary sacrifice means that, technically, the person is bringing home less income. This can influence things like maternity pay, mortgage applications, and pension contributions.

Impact on Statutory Sick Pay (SSP)

A salary sacrifice also has the potential to affect an employee’s SSP and, in some instances, even negate a person’s entitlement completely.

This is because, for someone to be eligible for SSP, their average weekly earnings must be above the Lower Earnings Level (LEL).

So, if a salary sacrifice reduces earnings below the LEL, they’ll no longer be entitled to SSP.

Impact on life cover

In some cases, an employee’s life cover may also be affected. This can vary from individual to individual, as some employers may still choose to cover this.

If you do choose to take a salary sacrifice, it’s vital to ensure that the details are reflected in your employment contract.

It’s also crucial to make sure that any salary sacrifices made don’t cause earnings to drop below the National Minimum Wage. Employers should have formal processes in place to monitor and manage this.

Salary sacrifice for limited company directors

Company directors can use salary sacrifice, but only in their capacity as employees of their own limited company.

In practice, this means the director must be paid a regular salary through PAYE and have an employment contract in place.

Any salary sacrifice arrangement must be agreed in advance, properly documented, and applied prospectively.

Directors should also be careful that sacrificing salary does not reduce pay below the National Minimum Wage where it applies, or affect entitlement to statutory payments.

For many owner-directors who already deliberately keep salaries low for tax planning, the scope for salary sacrifice may be limited, with employer pension contributions often the most practical and compliant use of the arrangement.

Looking ahead (Autumn Budget 2025 and National Insurance changes from 2029)

The Autumn Budget 2025 introduced significant changes to salary sacrifice pension schemes that will take effect from April 2029.

Under the new rules, salary sacrifice pension contributions will be capped at £2,000 per year for National Insurance relief purposes.

Any pension contributions above this threshold will attract both employee National Insurance (at 8% or 2%, depending on earnings band) and employer National Insurance (at 15%).

This means that while salary sacrifice for pensions will still provide income tax relief on the full amount contributed, the National Insurance advantages, historically one of the main reasons employees and employers used these arrangements, will be substantially reduced for higher contributions.

Other salary sacrifice schemes, such as cycle-to-work and childcare provisions, remain unaffected by this change.

Limited company directors should review their pension salary sacrifice arrangements in advance of April 2029 and consider how these changes might affect their benefits strategy and employee communications.

For more information, read the official guidance:

• HMRC guidance on salary sacrifice
• HM Treasury Autumn Budget 2024 policy paper on pension tax relief reform