Effects of the salary sacrifice cap on pensions
If you’re contributing to your pension through salary sacrifice, there’s a significant change coming in April 2029 that could affect your take-home pay and retirement savings. In the Autumn Budget 2025, the government announced a £2,000 cap on salary sacrifice contributions that remain exempt from National Insurance[1], and it’s causing concern across the pensions industry.
Let’s break down what this means for you, your employees, and your business.
What is the salary sacrifice cap on pensions?
Currently, there’s no limit on how much you can contribute to your pension through salary sacrifice while enjoying exemption from National Insurance. However, from 6 April 2029, only the first £2,000 of pension contributions made via salary sacrifice each year will remain exempt from both employee and employer National Insurance contributions.
Any contributions above this £2,000 threshold will be subject to National Insurance at the normal rates – 8% for employees earning under £50,270 and 2% for earnings above that level. Employers will pay their 15% National Insurance rate on the amount exceeding the cap.
The government estimates this change will raise approximately £4.7 billion by 2029/30 [2], though many industry experts believe this figure may be optimistic if employers restructure their pension offerings in response.
Who will be affected by the salary sacrifice cap on pensions?
According to HMRC’s impact assessment, around 7.7 million workers currently use salary sacrifice to make pension contributions [3]. Of these, approximately 3.3 million workers, about 44%, sacrifice more than £2,000 annually and will be affected by these changes.
But there is some good news. Around 56% of people using salary sacrifice, contribute less than £2,000 per year and won’t see any change to their National Insurance position. The government says the cap will “shield” 74% of basic rate taxpayers using salary sacrifice[4].
Real-world examples of the salary sacrifice cap impact
Let me give you some practical examples so you can see how this might affect different people:
Paul the Administrator: Paul earns £35,000 and contributes 5% of his salary (£1,750) through salary sacrifice. Because he’s under the £2,000 cap, nothing changes for him. He’ll continue enjoying the full National Insurance savings.
Sarah the Project Manager: Sarah earns £60,000 and contributes 6% of her salary (£3,600) via salary sacrifice. She exceeds the cap by £1,600. Sarah will pay National Insurance on this £1,600 excess – costing her an additional £128 per year in employee National Insurance, while her employer faces an extra £240 in employer National Insurance costs.
For someone earning £45,000 and contributing 5% (£2,250), the additional cost would be just £30 per year in employee National Insurance, with their employer paying an extra £34.
The hidden impacts on pension saving
While the direct National Insurance costs might seem manageable for the average employee, the broader implications worry pension experts [1]. Many employers currently pass their National Insurance savings back to employees as additional pension contributions. With the cap in place, these enhanced contributions could disappear for amounts exceeding £2,000.
Former Pensions Minister Steve Webb suggests that three in seven workers using salary sacrifice will be affected, warning that employers might respond by cutting back on workplace pension generosity altogether [5]. This concern isn’t unfounded – research by the Association of British Insurers found that 31% of businesses would reduce pension contributions if the cap was implemented, whilst 45% would cut other employee benefits[6].
What stays the same?
Despite the changes, it’s crucial to remember that pensions remain one of the most tax-efficient ways to save for retirement. Income tax relief continues on all pension contributions, regardless of whether they’re made through salary sacrifice or not. You can still contribute as much as you want to your pension – you just won’t enjoy National Insurance savings on amounts over £2,000 through salary sacrifice arrangements.
Salary sacrifice can still help people avoid moving into higher tax brackets, and it remains useful for managing adjusted net income to maintain eligibility for benefits like Child Benefit or Tax-Free Childcare.
Administrative burden on employers
The salary sacrifice cap on pensions won’t just affect workers’ pockets – it creates additional administrative complexity for employers too. Around 290,000 employers operating salary sacrifice arrangements will need to track contribution amounts against the £2,000 cap and report these to HMRC through existing payroll software[7].
Employers face one-off costs including staff training, software updates, and familiarisation with the new rules. HMRC itself expects to spend around £1.9 million on IT changes to support implementation.
What should you do now?
With April 2029 still several years away, you have time to prepare. If you’re an employer, consider:
– Reviewing your current pension provision and salary sacrifice arrangements
– Assessing how the changes might affect your employees
– Speaking with your accountant about restructuring options
– Planning communication strategies for affected staff
If you’re an employee benefiting from salary sacrifice, keep contributing. The National Insurance changes don’t diminish the significant income tax benefits of pension saving. Even with the cap, salary sacrifice remains valuable for many workers.
The bigger question is whether your employer will maintain their current level of pension support or make changes in response to their increased National Insurance costs.
Getting professional advice on pensions and salary sacrifice
The salary sacrifice cap on pensions could result in a significant shift in how we save for retirement. While the government maintains this makes the system fairer by targeting higher earners, the reality is that middle-income savers making responsible retirement provision will also feel the impact.
We’re monitoring these developments closely and helping our clients understand how the changes might affect their businesses and employees. If you need to review your company’s pension arrangements, understand your personal position, or plan for the changes ahead, we’re here to help.
Contact us today for a free consultation about how the salary sacrifice cap might affect your business or personal pension planning. Remember, no question is too silly when it comes to securing your financial future.
Contact Adams Accountancy
About the author
Michelle Adams is a qualified accountant and director at Adams Accountancy, a Dartford-based firm specialising in helping small and medium businesses across Kent and beyond. With over 15 years of experience supporting businesses with tax planning and compliance, Michelle and her team make complex financial matters simple and accessible. Adams Accountancy prides itself on creating a welcoming environment where no question is considered too basic.
For expert advice on pensions, tax planning, or any aspect of small business accounting, contact Adams Accountancy on 01322 250001 or visit www.adams-accountancy.co.uk .
Frequently asked questions
What is salary sacrifice for pensions and how does it work?
Salary sacrifice (also called salary exchange) is an arrangement where you agree to reduce your gross salary, and your employer contributes the same amount directly into your pension. This saves both you and your employer National Insurance because contributions are made before these taxes are calculated. You still receive full income tax relief on pension contributions made this way.
When does the salary sacrifice cap on pensions come into effect?
The £2,000 cap on National Insurance relief for salary sacrifice pension contributions takes effect from 6 April 2029. This gives employers and employees nearly four years to understand the changes and adjust their arrangements if needed.
Can I still contribute more than £2,000 through salary sacrifice?
Yes, you can continue making pension contributions above £2,000 through salary sacrifice arrangements. However, the amount exceeding £2,000 will be subject to National Insurance contributions at normal rates – both employee and employer National Insurance will apply to the excess amount.
Will the salary sacrifice cap affect my income tax relief on pensions?
No, income tax relief on pension contributions remains unchanged. You’ll still receive full income tax relief on all pension contributions, regardless of amount or method. The cap only affects National Insurance savings on contributions made through salary sacrifice arrangements [8].
Should I stop using salary sacrifice after the cap is introduced?
Not necessarily. Even with the cap, salary sacrifice remains beneficial for contributions up to £2,000 per year, and income tax relief continues on all contributions. The value depends on your personal circumstances, contribution levels, and whether your employer shares their National Insurance savings with you as additional pension contributions. If you aren’t sure what to do, talk to your accountant or financial adviser.
References
- Government announcement of £2,000 cap from 6 April 2029:
https://www.gov.uk/government/publications/changes-to-salary-sacrifice-for-pensions-from-april-2029/changes-to-salary-sacrifice-for-pensions-from-april-2029 - Expected revenue of £4.7 billion by 2029/30:
https://www.professionalpensions.com/news/4522394/budget-rachel-reeves-limits-salary-sacrifice-pension-contributions - HMRC impact assessment showing 7.7 million workers use salary sacrifice and 3.3 million (44%) sacrifice more than £2,000:
https://www.pensionsage.com/pa/Concerns-over-salary-sacrifice-cap-grows-as-HMRC-reveals-impact-assesment.php - Government claim that cap will “shield” 74% of basic rate taxpayers:
https://www.professionalpensions.com/news/4522394/budget-rachel-reeves-limits-salary-sacrifice-pension-contributions - Steve Webb’s warning that “three in seven” workers using salary sacrifice will be affected: https://www.pensionsage.com/pa/Concerns-over-salary-sacrifice-cap-grows-as-HMRC-reveals-impact-assesment.php
- Association of British Insurers research showing 31% of businesses would reduce pension contributions and 45% would cut other benefits:
https://www.professionalpensions.com/news/4522394/budget-rachel-reeves-limits-salary-sacrifice-pension-contributions - 290,000 employers operating salary sacrifice arrangements will be affected:
https://www.pensionsage.com/pa/Concerns-over-salary-sacrifice-cap-grows-as-HMRC-reveals-impact-assesment.php - Income tax relief continues unchanged on all pension contributions:
https://www.gov.uk/government/publications/changes-to-salary-sacrifice-for-pensions-from-april-2029/changes-to-salary-sacrifice-for-pensions-from-april-2029