OVERVIEW OF SALARY SACRIFICE CHANGES

One of the less surprising measures in the Autumn Budget 2025 was the announcement of changes to the NIC treatment of pension contributions made via salary sacrifice. From 6 April 2029, the amount of employee pension contribution that can benefit from NIC relief through salary sacrifice will be capped at £2,000 per tax year. Any salary sacrificed for pension above this level will become subject to both employer and employee NICs, although income tax relief on pension contributions will be unaffected.​

Background and justification

In May 2025, HMRC published research into the attitudes and behaviours of employers towards salary sacrifice for pensions, including their reactions to several hypothetical reforms. Of the scenarios tested, the option that received the most employer support was a model that retained NIC relief on salary sacrifice, but capped it at £2,000 per employee per year. This is effectively the approach now being legislated, with the relevant provisions scheduled to take effect in 2029 in the National Insurance Contributions (Employer Pensions Contributions) Bill 2025–26.​

The Government’s justification focuses on the rapid growth in the Exchequer cost of NIC relief on pension salary sacrifice, which has risen from an estimated £2.8 billion in 2016/17 to £5.8 billion in 2023/24 and is projected to reach around £8 billion by 2030/31. There is also a policy question around fairness, given that salary sacrifice currently delivers more generous NIC treatment than conventional member contributions under relief at source or net pay arrangements.​

Impact on employees

For employees, the change does not limit how much can be paid into a pension via salary sacrifice, but it does restrict how much of that contribution can be sheltered from NICs. NIC savings will continue to apply on the first £2,000 of sacrificed salary each tax year, with employee NICs then payable on any excess at the relevant main or upper rate.​

For example, an employee with pensionable salary of £50,000 who sacrifices 5% (£2,500) into a pension would see £2,000 of that contribution remain NIC-free, but NICs would be due on the remaining £500. Assuming the main employee NIC rate of 8% continues to apply at this level, this would represent an increase in employee NICs of 8% × £500 = £40 per annum. For earnings above the Upper Earnings Limit, the additional NICs on salary sacrifice above £2,000 would instead be charged at the 2% employee rate, which will be more relevant for higher earners whose contributions push beyond that threshold.​

Whether these additional NIC costs will materially change employee behaviour remains uncertain and may depend on how employers communicate the changes and whether they choose to adjust overall reward structures.​

Impact on employers

The reforms are likely to feel more significant for employers, particularly those with high take-up of salary sacrifice and higher average contribution levels. Currently, employer NICs are generally charged at 15% on earnings above the secondary threshold, with full NIC exemption applying to salary given up under pension salary sacrifice. From April 2029, only the first £2,000 of sacrificed salary per employee per year will remain exempt, with employer NICs becoming payable at 15% on any excess.​

In many schemes, employers share some or all of their NIC savings with employees by way of higher pension contributions or other benefits, so the reduction in NIC relief could directly erode this headroom. For employers already absorbing the recent increase in the main Class 1 employer NIC rate from 13.8% to 15%, this may prompt a review of whether and how NIC savings are shared, and could lead to changes in contribution structures or the overall competitiveness of pension benefits.​

By way of illustration, HMRC and professional bodies have modelled that when pension salary sacrifice of £5,000 a year is used, the loss of NIC relief above the £2,000 cap can give rise to additional employer NICs of around £450 per annum at a 15% rate. At scale, these amounts will compound across the workforce, especially in sectors with high average contributions or widespread flexible benefits arrangements.​

Scale of the reform

The Government’s own impact assessment suggests that around 7.7 million employees currently use salary sacrifice for pensions, of whom approximately 3.3 million (44%) are expected to be affected by the cap. The remaining majority are expected to fall within the £2,000 NIC‑free allowance, particularly lower and median earners making minimum automatic enrolment contributions.​

Planning considerations and ‘cliff edges’

Despite the reduction in NIC advantages, salary sacrifice will still reduce taxable pay for income tax purposes. This means salary sacrifice can remain a useful planning tool for individuals close to income tax or benefit ‘cliff edges’, such as the High Income Child Benefit Charge, childcare support thresholds, or the tapering of the personal allowance.​

HMRC has confirmed that the planned changes will not affect how salary sacrifice interacts with adjusted net income for these means-tested tests, so the ability to manage taxable income via pension funding remains intact. For some employees, the continued income tax and benefit advantages may outweigh the loss of NIC relief on part of their contributions, particularly where employers maintain generous matching or continue to share NIC savings.​

Timing and next steps

Although the effective date is not until 6 April 2029, the Government has been clear that the delayed implementation is intended to give employers, payroll providers and pension schemes time to adapt, rather than to allow for a further policy rethink. The legislation is already progressing through Parliament and, at the time of writing, is at second reading stage, indicating a strong likelihood that the reforms will proceed broadly as announced.​

In practice, employers may wish to review existing salary sacrifice arrangements well ahead of 2029, including how NIC savings are currently used and whether changes to scheme design, communication or contribution structures are appropriate. Advisers can add value by helping both employers and employees understand how the cap interacts with wider pension planning, tax allowances and benefit thresholds, ensuring salary sacrifice remains integrated into coherent long-term planning rather than viewed purely as a NIC-saving device.

All information is based on our understanding and interpretation of applicable law and regulation which is subject to change.