Sheet of paper on a desk with the text "salary sacrifice" printed on it, surrounded by calculator, coins, spectacles and open coin jar
Proposed changes to salary sacrifice pension contributions

It was announced in the 2025 Budget that from April 2029, a new £2,000 annual cap will apply to salary sacrifice pension contributions that qualify for National Insurance (NI) relief.

Currently, salary sacrifice allows employees to exchange part of their salary for employer pension contributions, delivering tax and NI savings for both parties. Many employers share their NI savings by paying some or all of the amount they save into the employee’s pension fund as additional employer contributions, making this an attractive benefit.

Under the proposals, contributions above £2,000 will attract full NI charges for both employer and employee. However, income tax relief for the employee will continue to be unrestricted. Pension contributions will therefore remain an effective method for employees to reduce tax and manage their annual income for the purposes of tax-free childcare, High Income Child Benefit Charge and avoiding personal allowance taper.

Why It Matters

Salary sacrifice is popular not only because it saves NI for both parties but also delivers immediate tax relief, avoiding the need for higher-rate employees to claim additional relief later.

If the changes go ahead as proposed, employees will need to weigh the impact of NI charges against contribution levels, while employers face recalculating remuneration packages, and possibly renegotiating employee contracts. Employers should keep in mind the Operational Remuneration Agreement (OpRA) rules and employment law especially where changes would need to be agreed by the entire workforce.

Unusually, no anti-forestalling measures were introduced in the Finance Bill. Anti-forestalling refers to measures introduced to prevent individuals or businesses from taking advantage of a delay between the announcement of a tax change and its implementation.

Essentially, these rules are designed to stop people from restructuring their affairs in advance to avoid the intended effect of new legislation. For example, if the cap on salary sacrifice contributions is confirmed for April 2029, anti-forestalling rules would normally prevent employers and employees from making unusually large contributions before that date to lock in current tax advantages.

Unless (and until) anti-forestalling measures are introduced there may opportunities for employers and their employees to revisit remuneration and benefit packages and restructure if necessary.

However, it should be noted that the long lead time to implementation implies that further measures will be added in due course and there are still areas requiring clarification in the final legislation:

  • Will there be a limit to the amount employers can contribute above which contributions will be deemed as de facto salary sacrifice?
  • How will the salary sacrifice cap be applied where an employee elects for salary sacrifice pension contributions across multiple employments?
  • How will non-contractual payments, such as bonuses, paid as pension contributions, be treated? It is likely where there is a choice between cash or pension contribution, the payment will be considered to be salary sacrifice.

What Employers Should Do

Although there is some time before this measure is due to be implemented, and as mentioned above, the situation may change before the proposed start date of 6 April 2029, employers should keep abreast of changes and consider the following:

  • Review current arrangements and calculate the potential impact of the changes.
  • Plan payroll system updates to apply the cap and report correctly.
  • Communicate early with employees to manage expectations.
  • Start to consider alternative benefits or pension contribution strategies.

As with all investments, employees should seek their own independent financial advice when considering pension contribution options.

 

This article reflects the position at the date of publication shown above. If you are reading this at a later date you are advised to check that that position has not changed in the time since.  

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