You might already know that salary sacrifice can be a practical way for your employees to bolster their retirement funds, while reducing their tax liability.
However, in the 2025 Autumn Budget, the government announced changes to how salary sacrifice is treated for National Insurance (NI) purposes.
From April 2029, a new cap will be introduced, limiting the portion of pension contributions exempt from NI to £2,000 a year.
While 2029 might seem a long way off, this is the ideal time to think carefully about how you and your business might be affected so you can be prepared.
Continue reading to discover exactly how the salary sacrifice pension cap will work, and what it means for your business’s retirement planning.
Salary sacrifice is a way for your employees to exchange a portion of their income for benefits
Salary sacrifice involves an employer and employee agreeing to a reduction in gross pay in exchange for non-cash benefits.
These might include:
- Employer-provided healthcare
- Gym memberships
- Financial advice
- Company cars (especially electric vehicles).
Perhaps the most popular non-cash benefit is pension contributions. For many other non-cash benefits (known as “benefits in kind”), tax might still be due. However, pension contributions made via salary sacrifice are typically exempt from both Income Tax and NI.
Furthermore, when your employees sacrifice a portion of their salary, you might then decide to contribute the equivalent amount to their pension. Currently, this allows you to significantly boost their retirement fund.
Moreover, as an employer, you currently benefit from not paying Class 1 secondary National Insurance contributions (NICs) – 15% in 2025/26 – on the amount sacrificed by your employee. This results in a tax saving.
However, from April 2029, the government will limit the NI efficiency on these contributions. While your employees won’t pay Income Tax on your contributions, any amount sacrificed into a pension above £2,000 a year will attract NI.
For the portion exceeding the cap, employees will pay Class 1 NICs, while you will be liable for the 15% rate.
If you’re a business owner, you might want to review your pension strategy
As a business owner, these changes to the salary sacrifice regime can affect your company’s finances and your personal tax situation.
If you pay directly into your pension from your business, or do the same for your employees, nothing will change.
However, if you currently have salary sacrifice arrangements with your employees, or use salary sacrifice to fortify your own pension, the 2029 cap means that making pension contributions will become more expensive.
As an example, every £1,000 sacrificed over the £2,000 limit by you or your employees could see your business face a £150 NI charge.
Furthermore, if you currently share the employer NIC savings with employees to top up their pots, you may need to assess how the new NI charge might affect you.
Otherwise, if your business encourages higher pension savings, you might find your company costs rise significantly in 2029.
As such, it’s worth reviewing any existing salary sacrifice arrangements and employment contracts, and then modelling how contributions exceeding £2,000 might impact your business.
After building this model, you should confirm whether contributions are through salary sacrifice or as standard employer contributions. It might even be prudent to assess your remuneration approach for any key members of staff.
While April 2029 might seem like a long time in the future, taking steps to prepare your business now could help you soften any potential blows later down the line.
It’s useful to understand how the cap might affect your employees
While your own planning is important, it’s also a good idea to consider the impact the change could have on your employees, such as seeing their take-home pay drop as their NI bills rise.
For example, an employee earning £60,000 a year and contributing 6% of their salary into their pension through salary sacrifice would have annual contributions of £3,600. Since this would exceed the £2,000 cap by £1,600, they would pay NI on this amount.
Despite the cap, it may be worth informing your employees that salary sacrifice can still be a practical way to manage their tax liability.
Indeed, the higher-rate band for Income Tax starts at £50,271 as of 2025/26. If an employee earns £50,000 and receives a 5% pay rise to £52,500, they would normally be pushed into the 40% bracket.
They could, however, sacrifice that £2,500 into their pension to remain in the basic-rate band.
Even though they would now pay NI on the £500 of the contribution above the cap (assuming they make no other pension contributions), the Income Tax savings could still make this approach financially beneficial.
It’s is important to note that if salary sacrifice is a popular perk in your business, your company might seem less attractive to the talent you wish to hire from 2029 onwards.
A capped NI benefit might deter higher-level talent, turning them towards competitors who offer a higher base salary or more generous direct pension contributions.
To stay competitive, you may want to consider paying more into your employees’ pensions rather than offering a higher salary.
Get in touch
We could help you deal with some of the tax complexities of the new salary sacrifice rules well ahead of the deadline.
Please note:
This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pensions Regulator.
The Financial Conduct Authority does not regulate tax planning.