How the UK Budget Has Affected Salary Sacrifice Pension Schemes

The recent Autumn Budget has announced changes to the salary sacrifice system.

Salary sacrifice pensions are popular because they reduce Income Tax and National Insurance Contributions (NICs) for the employees.

Budget 2025 outlined the government's plan to introduce a £2,000 cap on NIC relief for salary sacrifice.

While most workers won’t feel immediate effects, higher earners and long-term savers will.

Understanding Salary Sacrifice

Salary sacrifice is a system that allows employees to voluntarily forgo part of their salary, which is then replaced by an employer-provided benefit. These benefits can vary by company, but the main attraction was that the employer would then pay the sacrificed amount into the employee’s pension scheme.

Aside from the given benefits, salary sacrifice also resulted in the employee paying less Income Tax and NICs due to the lower taxable income. This, combined with employers' savings on Employer NICs, made it an attractive perk. It is particularly popular among high earners who were able to avoid higher tax brackets through sacrifice, as well as long-term pension savers looking to boost their retirement savings efficiently.

What’s changed?

From 2029, only the first £2,000 of your pension contributions through salary sacrifice will be exempt from paying NICs. But the overall pension contributions and the Income Tax relief will remain unchanged.

The government stated the changes were made because the relief had grown beyond its original policy intent, and some tax reliefs disproportionately benefited higher earners. The government also cited a ballooning forecasted cost of £8 billion by 2031, and stated that 74% of basic-rate taxpayers will be unaffected by the coming policy.

Income Tax relief will not be affected, and all pension contributions will remain exempt. This policy change does not alter existing pension annual allowance rules or the cap on pension contributions.

Who Will Be Affected

Basic-rate taxpayers and those early in their pension payments are unlikely to be affected by these changes. Those making modest pension contributions can still take advantage of the structure and benefits that salary sacrifice provides.

Higher earners are set to be affected the most, as well as those wanting to increase contributions in line with wage increases.

With higher earners contributing larger amounts to their pensions, they risk surpassing the threshold quicker than others. Although Income Tax relief will still be given, the overall efficiency of the sacrificed amount will diminish.

As wages rise and tax thresholds remain frozen, more employees may gradually cross the £2,000 cap without actively changing their saving behaviour. What once felt like a highly efficient contribution strategy may, eventually, deliver slightly lower take-home savings year by year and could require reassessment of how much to sacrifice.

Since the change applies only after the initial £2,000 annual threshold is crossed, many savers may not notice the impact immediately, making regular review of contribution levels critical over time.

What This Means in Practice

Salary sacrifice is not being removed or replaced. Even with the NIC cap, most employers will likely continue offering it to employees if it’s part of their benefits package. The 2029 start date suggests the impact will likely emerge gradually. This delayed start gives employers and employees time to consider future contracts and reassess long-term plans.

Lower earners and those who are unlikely to surpass the cap will still see the benefit of taking this option.

For higher earners who had factored salary sacrifice into their long-term planning, the change may challenge expectations. It may also mean reluctance to commit to salary sacrifice in new contracts, as well as reassessment of overall pension strategies, rather than reliance on contribution structures alone. This places a heavy emphasis on future contract conditions and benefits, potentially necessitating replacing salary sacrifice with another benefit.

From an employer's perspective, this may prompt a reassessment of how pensions sit alongside other retention tools and consideration of alternatives for their senior and long-serving staff who may be most affected by the new cap.

For savers, the changes don't require immediate action, but they do change some of the assumptions that long-term plans may have been built on.

As the new rules approach, some considerations become more relevant. For employees, an awareness of how much of a pension contribution benefits from NIC relief might assist with planning. For an employer, an awareness of how employment benefits fit into their overall compensation packages may help future retention policies.

As pension rules evolve, clarity and flexibility become just as important as the contributions themselves.