Big changes are coming to salary sacrifice in April 2029. A new £2,000 cap on National Insurance contributions relief could affect millions of employees and thousands of businesses. What does this mean for your pension contributions and how can you prepare?
Salary sacrifice – sometimes called salary exchange – is a popular and tax-efficient way to save into a pension. However, reforms announced in the Autumn Budget mean salary sacrifice rules will change from April 2029. While that may feel a long way off, it’s already raising questions: what’s changing, why now, and will it affect you?
From April 2029, the amount of employee pension contributions that can be made through salary sacrifice without paying National Insurance contributions (NICs) will be capped at £2,000 per year.
At the moment, salary sacrifice works like this: you agree to reduce your gross salary (or bonus), and your employer pays that amount directly into your pension instead. Because your salary is lower, both you and your employer save on NICs.
Under the new rules:
The government’s position is that the reform makes the system “fairer and more sustainable”. In simple terms, it believes that pension contributions made via salary sacrifice above £2,000 should be taxed in the same way as other types of contributions.
By introducing a cap, rather than abolishing salary sacrifice entirely, the government partially keeps the incentive for this kind of saving, while gathering moderately more funding for the Exchequer.
It’s also worth stressing that this is a future reform, not an immediate one. With implementation happening in 2029, employers, payroll providers and individuals have plenty of time to adapt.
If your salary sacrificed contributions stay under £2,000 per year, or if you don’t use salary sacrifice at all, there will be no change to your NIC position.
Those who are affected include:
At higher income levels, it’s much easier to exceed the £2,000 threshold. Under the new rules, any sacrificed amount above that figure will attract NICs.
For most employees, the impact will be minimal. Here’s what it could look like for 5% contributions:
Non-pension salary sacrifice arrangements are unchanged. Employees who sacrifice salary to receive the Tax-Free Childcare or Child Benefit, for example, can continue to do so.
Employees will not need to contact HMRC as a result of the change. The associated admin will be done by their employer.
This change is arguably most important for business owners who use salary sacrifice at their company.
While employer pension contributions will remain exempt from NICs, employee contributions above £2,000 made via salary sacrifice will attract employer NICs from April 2029.
That matters even more in light of the previous Budget, which increased the rate of employer NICs to 15%. In simple terms, the cost of employing people has already risen, and this reform adds another potential NIC cost where salary sacrifice is used at scale.
Employers will also need to report the total amount sacrificed to HMRC, so they can determine the tax liability.
Around 3.3 million employees and 290,000 businesses are expected to be affected by the reform.
Although April 2029 feels a long way off, there are some considerations to bear in mind now.
1. Salary sacrifice is still tax-efficient
Even after the changes, salary sacrifice is more efficient than many alternative contribution methods. NIC savings will still apply to the first £2,000 each year, and between now and 2029, the full NIC advantage still applies. The next few years are a good opportunity to make use of the full savings while they’re still in place, if that suits your financial plan.
2. Higher earners should review their strategy
If you’re contributing more than £2,000 through salary sacrifice, the reform may slightly reduce the overall efficiency of future contributions. You may wish to look at whether a mix of salary sacrifice and other forms of savings might be more appropriate, in consultation with a financial adviser.
3. Business owners should factor in cost and payroll changes
Employers will front the highest costs under the change, which may impact how they use salary sacrifice. They will also need to ensure payroll systems can accommodate the new reporting requirements. You may incur one-off costs for software updates and staff training, so it’s sensible to allow time and budget for that.
4. Don’t make knee-jerk decisions
Three years is a long time in pensions and tax policy. Any big changes should be driven by your wider financial goals, not just this reform.
The salary sacrifice reform introduces an extra layer of cost for many higher earners and business owners. That’s a real consideration, but it may not be wise to abandon salary sacrifice altogether.
In many cases, salary sacrifice may still be the most tax-efficient way to contribute to a pension, given ongoing savings on the first £2,000. And until April 2029, the current, more generous rules remain in place.
If you’d like to understand what this could mean for your own contributions or your business, a personalised review can help bring the numbers to life.
This article is for information purposes only. It is not intended as financial advice.
Fees and charges apply.
Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Also, in this article we refer to the tax rate and thresholds set for England and Northern Ireland, these may differ for the devolved nations of Scotland and Wales.
The retirement benefits you receive from your pension plan depend on a number of factors including the value of your plan when you decide to take your benefits which isn’t guaranteed and can do down as well as up. The benefits of your plan could fall below the amount(s) paid in.
