With the end of the tax year getting closer, it is a good time to remind you that you can increase your regular Salary Exchange (sometimes known as Salary Sacrifice) contribution at any point, and if you are due a bonus before the end of the tax year, then ‘exchanging’  some or all of that bonus could be beneficial if you need to control your tax liability for the 2025/26 tax year.
 
From April 6, 2029, the UK government will cap the amount of salary-exchanged pension contributions exempt from National Insurance (NI) at £2,000 per year. Any contributions above this amount will become subject to employee and employer National Insurance.
 
Maximising salary exchange before this date should be considered to take advantage of locking in the full tax efficiencies currently available, particularly if you are a higher earner and/or you are contributing large amounts.
 
Here are the key reasons to consider maximising salary exchange before the 2029 reduction:
 
1. Lock in Full National Insurance (NI) Savings

• After the amount that is paid by Salary Exchange is deducted, your salary must keep you on or above the National Minimum Wage.
• Until 2029, employees and employers can save significantly on NI, often 8% for employees below the higher-rate threshold and 2% above.
• Act now to maximise the savings opportunity before the £2,000 per annum cap is introduced.

2. Boost Retirement Savings Before Costs Rise 

• Maximising contributions now means more money enters your pension without being taxed, allowing for more time to benefit from tax-free growth.

Summary of 2029 Changes

• Before April 2029: Full income tax and NI relief on all salary-exchanged pension contributions.
• From April 2029: Only the first £2,000 of sacrificed salary is free from NI.

Crucial notes

It’s important to note that Income Tax relief on pension contributions remains in full, even after 2029; the change will only affect National Insurance. This means that you will still be able to participate in salary exchange for pensions and make the most of Income Tax savings it affords in 2029/30 and beyond.

The maximum that you can pay into your pension in any tax year is the lower of 100% of your earnings or £60,000

Other potential benefits of using Salary Exchange to reduce your gross earnings are:

• Giving you the opportunity to reduce your gross earnings so that you fall into a lower Income Tax bracket
• Reducing your gross earnings so that you qualify for certain benefits, for example child benefit and the reductions that occur if your salary is between £60,000 and £80,000

If you have any questions regarding this, or would like to understand how a Financial Planner could help with your retirement planning, please contact [email protected] and we'll get this arranged.

When investing your capital is at risk. The Financial Conduct Authority does not regulate tax advice.