The Impact of the New Salary Sacrifice Limit on Pension Contributions 

The government is set to introduce a new cap on salary sacrifice arrangements for pension contributions, which will take effect from April 2029. The change, announced in the Autumn Budget 2025, means that only the first £2,000 of employee pension contributions made through salary sacrifice will be exempt from National Insurance Contributions (NICs). The move is expected to primarily impact middle-to-higher earners and could lead to reduced take-home pay for some employees and increased costs for employers.  

What the new change means 

Currently, an employee can sacrifice a portion of their salary in exchange for their employer paying a higher amount into their pension. This reduces both employee and employer NICs, as the contributions are made from a lower gross salary.  From April 2029, this NIC exemption will be limited. 

Worked Examples: The £2,000 Cap 

Example 1: If you earn £37,000 a year and pay 5% of your salary into your pension via salary sacrifice, this will make your contributions equal to £1,850 a year. As this is under the new £2,000 cap, National Insurance would be exempt in this case. 

Example 2: If you earn £60,000 a year and contribute 6% of your salary to your pension via a salary sacrifice scheme, you will see the following changes:  

Current Situation

• Annual salary sacrifice:  £60,000 x 6% = £3,600. 

• Amount exempt from NICs: The full £3,600. 

• Result:  Both employee and employer save on NICs for the entire contribution. 

New Situation (From April 2029)

• Total annual salary sacrifice: £3,600. 

• Amount exempt from NICs: £2,000. 

• Amount subject to NICs: £3,600 – £2,000 = £1,600. 

This means a higher-rate taxpayer will now pay employee NICs on the £1,600 excess. For someone earning over £50,270, the rate is 2%. 

• Employee’s additional annual NICs: £1,600 x 2% = £32. 

• Employer’s additional annual NICs: Employers currently face a 15% charge on contributions above the secondary threshold. This means the employer’s additional annual NICs will be £1,600 x 15% = £240. 

Wider implications of the new limit 

Some employers may be forced to scale back pension contributions or other benefits to offset the increased costs. 

Despite the change, pension contributions will still be exempt from income tax, and income tax relief will continue to apply. The new rule also provides some lead time, allowing individuals and businesses to adjust their strategies before April 2029. 

If you have any questions about recent or upcoming changes to tax rules in the UK, please contact our Tax Director, Liam Coulter, for a confidential discussion.