Learn how workplace pensions work, how contributions are calculated, and how salary sacrifice can boost your retirement savings. A simple UK guide for employees.
Workplace Pensions: How they work and how to get the most from yours
If you’re employed in the UK, chances are you already have a workplace pension. But do you know how it works - or how to make the most of it? In this short guide, we’ll walk through the basics, explain contributions and salary sacrifice, and show you how to maximise what your employer offers.
By the end, you’ll be able to:
- Understand how workplace pensions work
- Recognise how salary sacrifice can boost your savings
- Make the most of your employer contributions
What is a workplace pension?
A workplace pension is a retirement savings plan set up by your employer. Each month:
- you contribute a portion of your salary
- your employer contributes extra
- the government adds tax relief
The result? You’re saving more without lifting a finger.
Auto-enrolment rules
You’ll be automatically enrolled if you:
- are aged 22 or over
- earn more than £10,000 a year
- work in the UK
You can opt out - but staying in means you’re receiving free money from your employer and the government. That’s worth keeping.
How salary sacrifice works
Salary sacrifice is a tax-efficient way to increase your pension contributions. It works like this:
1. You choose how much salary to sacrifice
Example: you sacrifice £100 from your monthly salary.
2. Your employer pays that £100 directly into your pension
Because it goes straight into your pension before Income Tax and National Insurance are deducted, the full amount lands in your pension pot.
Why this is smart
If you take that £100 in pay:
- a basic rate taxpayer might keep ~£80
- a higher-rate taxpayer might keep ~£60
With salary sacrifice, the full £100 goes into your pension.
3. You and your employer save National Insurance (NI)
Reducing your salary reduces your NI bill - and your employer’s.
Many employers pass on part (or all) of their NI savings into your pension too.
Tip: Check if your employer adds their NI savings to your pension - it can boost your pot even further.
4. Important future change to salary sacrifice (from April 2029)
Following the Autumn Budget 2025, the UK government announced a future change to salary sacrifice for pensions.
From April 2029, the National Insurance savings on salary-sacrificed pension contributions will be capped at £2,000 per tax year.
What this means in practice:
- The first £2,000 you contribute via salary sacrifice each year will continue to benefit from NI savings
- Any amount above £2,000 will no longer reduce National Insurance for you or your employer
- Income tax relief on pension contributions is not affected and will continue as normal (within pension allowance limits)
Salary sacrifice will still exist, but for higher contributions the NI advantage will be smaller than it is today.
Should this change how you use salary sacrifice?
For most people, salary sacrifice will remain a valuable way to save into a pension, especially when combined with employer contributions.
However, as rules evolve, it’s worth:
- Reviewing how much you sacrifice each year
- Checking whether your employer passes on NI savings
- Keeping an eye on future changes so your pension strategy stays aligned with your goals
Small adjustments now, and staying informed, can make a meaningful difference to your retirement outcomes.
Making the most of employer contributions
By law, employers must contribute at least 3%, but many will match higher contributions if you increase yours.
Example
- You contribute 5%
- Employer contributes 5%
- Total: 10% of your salary invested every month
Check your plan:
- What percentage do you currently contribute?
- Is your employer willing to match more?
- Are you missing out on free contributions?
Even a 1% increase now can significantly grow your pot over time.
Where is your money going?
Your workplace pension isn’t just sitting in an account. - it’s invested so it can grow. Most schemes offer a range of options, from low-risk to long-term growth funds.
You don’t have to be an expert, but it helps to know:
- where your pension is invested
- how it’s performing
- whether it matches your goals and timeline
- if your plan aligns with your values (e.g., ethical investing)
What if you change jobs?
When you change employer, your pension doesn’t move automatically. Over time, this can leave you with multiple pots.
Your options:
- Leave them where they are
- Combine them into one pension
- Transfer into your new workplace scheme
Combining pensions can make things easier to manage, but always check:
- fees
- investment performance
- any valuable benefits attached to old schemes
Final thoughts
Your workplace pension is one of the most valuable financial benefits you receive. It builds your future income quietly in the background - and with a few smart choices, you can boost it even further.
Unlike the State Pension, most workplace pensions (as defined contribution schemes) can be accessed from age 55 (rising to 57 from 2028). And as an added advantage, unused pension savings can usually be passed on to loved ones, making it a powerful asset for future generations.
Small tweaks today - like exploring salary sacrifice or checking if your employer matches higher contributions - can make a big difference later.
