Salary sacrifice pension rules are changing: Will this affect you?

Salary sacrifice has long been one of the most tax-efficient ways for employers and employees to pay into a workplace pension.

However, changes announced in the Autumn Budget 2025 will reduce some of the tax advantages it currently offers.

Although the new reforms are still a few years away, employers and employees must understand what they mean and assess how their pension contributions are affected.

What is changing around salary sacrifice?

Currently, pension contributions made through salary sacrifice are exempt from Income Tax and National Insurance Contributions (NICs) for employees and employers.

This relief has made salary sacrifice a valuable way to increase 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 threshold will be subject to employee and employer NICs, although all pension contributions will continue to benefit from full Income Tax relief.

How will employees feel the impact?

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

Employees who currently sacrifice more than £2,000 each year into their pension will begin paying NICs on the excess once the new rules apply.

Lower and middle earners may feel the impact the most. 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 continue to reduce adjusted net income and help people avoid higher-rate tax and the £100,000 personal allowance taper.

How will employers be affected?

From April 2029, employer NICs will apply to 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 unsustainable.

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

Any changes made must be handled carefully, as pension and salary sacrifice arrangements are often included in employment contracts and require clear communication with employees.

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 review how much they contribute to their pension and consider increasing 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 structures, matching policies, bonus sacrifice arrangements and whether current pension contributions are sustainable once the new rules apply.

Clear communication is crucial 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 support, employers can carry out cost modelling and ensure their pension structures are compliant with the new rules.

Our professional team can help you make informed decisions on your pension contributions and prepare you for any potential changes before April 2029.

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