Salary sacrifice pension rules are changing: Who pays the price?

Salary sacrifice has long been one of the most tax-efficient ways to save into a workplace pension.

However, those benefits are set to be reduced following the changes announced in the Autumn Budget 2025.

While the reforms are still a few years away, employers and employees must understand what the new rules mean for them and allow enough time to prepare.

What is changing around salary sacrifice?

Under the current system, pension contributions made through salary sacrifice are exempt from Income Tax and National Insurance Contributions (NICs).

This applies to employees and employers and makes salary sacrifice a valuable way to increase your pension savings and reduce payroll costs.

However, from April 2029, this will all change.

The Budget announced that only the first £2,000 per year of pension contributions made through salary sacrifice will remain exempt from NICs.

Any amount sacrificed above this level will be subject to employee and employer NICs, although all pension contributions will continue to receive full Income Tax relief.

How will this affect employees?

A recent OBR analysis indicated that around 4.3 million more people than expected will feel the impact of the cap.

Employees who sacrifice more than £2,000 each year will see NIC deducted on the excess and could reduce their take-home pay compared to the current rules.

Lower and middle earners may feel the impact more. Those earning below the higher-rate tax threshold could pay NIC at up to eight per cent on contributions above the cap, while higher earners will pay two per cent.

However, pensions will still be an effective way to reduce adjusted net income and help people avoid higher-rate tax and the £100,000 personal allowance taper.

How will this affect employers?

From April 2029, employers will pay employer NICs on salary sacrifice pension contributions above £2,000, which could potentially increase payroll costs.

Businesses that match employee contributions above the minimum level or share their employer NIC savings through greater pension contributions may find these arrangements become more expensive.

Some employers may need to reconsider their contribution structures and bonus sacrifice arrangements ahead of the implementation.

Any changes made must be handled carefully and employees must be fully informed, as pension and salary sacrifice arrangements are often included in employment contracts.

Employers will need to reassess the financial implications on their payroll and seek financial support to review the impact on their cash flow.

What should you be doing now to prepare?

Although the salary sacrifice changes may feel far away, waiting until the last minute could limit your options.

Employees should be reviewing how much they contribute to their pension and potentially increase contributions while the full NI relief is still available.

However, any changes should be made carefully as salary sacrifice reduces contractual pay.

Businesses and employers should begin modelling the financial impact of the employer NIC being applied to salary sacrifice contributions above £2,000.

This includes reviewing contribution matching policies, bonus sacrifice arrangements and whether current pension contributions are sustainable once the new rules apply.

Clear communication is just as important as financial planning, as employees are likely to have questions over how the reforms will affect their take-home pay and retirement savings.

How can we help?

The salary sacrifice reforms are not coming into effect for a few years and it is possible that further changes could be made before then.

With the right financial support, you can make informed decisions on your pension contributions and understand how they affect your long-term financial planning and workplace pension schemes.

We can help employees assess how the cap will affect take-home pay and support employers with cost modelling and compliance.

For further advice and support on the salary sacrifice changes, contact our team today.