Here’s a breakdown of what the recent “salary sacrifice shake-up” means for staff and employers under the new rules announced in the 2025 UK Budget.
🔧 What’s changing (what the shake-up actually is)
Under the new rules, from April 2029 the amount of pension contributions made via salary sacrifice that are exempt from National Insurance Contributions (NICs) will be capped at £2,000 per year per employee.
Pension contributions above this £2,000 threshold will no longer be NIC-exempt — they will be treated as ordinary pension contributions, meaning both employee and employer NICs become payable on the excess.
The income-tax relief on pension contributions remains unchanged (subject to existing pension contribution limits).
Employers can still make pension contributions (not via salary sacrifice) tax/NIC-free — it’s only the “salary-sacrificed” portion from employees that gets the new cap.
Put simply: salary sacrifice isn’t banned — but the big NIC-saving benefit for large pension contributions via salary sacrifice is being stripped back significantly.
👥 Implications for Employees (Staff)
For people who use salary sacrifice to top up their pension modestly (roughly £2,000 or less per year), the impact will be minimal — for them, nothing changes.
For people making larger pension contributions via sacrifice (common among higher-earners or those actively building up their retirement savings), their take-home pay will likely drop compared to current arrangements, because NICs will be charged on the portion over £2,000.
It could reduce the attractiveness of salary-sacrificing large amounts — meaning some people may contribute less, potentially affecting their long-term pension outcomes. Many commentators warn this could harm retirement savings, especially for those who counted on the tax/NIC benefits.
On the flip side, the continued income-tax relief and the ability to use “regular” employer pension contributions still gives some room for pension saving — just with less of a NIC-saving incentive.
🏢 Implications for Employers
Employers who currently offer salary-sacrifice pension schemes will see increased NIC costs starting 2029 for any employee contributions above £2,000.
There will also be administrative and compliance burdens — for example, payroll systems will need to be updated, and employers must report the total amount sacrificed by employees.
As a result, some employers (especially smaller ones or those with many higher-earners) may decide the scheme is no longer cost-effective — and could scale back or scrap salary-sacrifice offers.
Employers might instead shift to offering direct pension contributions (i.e. employer-paid rather than salary-sacrificed) — those remain NIC-free under the rules.
⚠️ Risks, Trade-offs and Broader Consequences
For many, the change reduces the incentive to save heavily into pensions via salary sacrifice — which could lead to lower long-term pension savings overall. Some experts regard the move as a blow to retirement readiness.
The measure disproportionately affects higher earners or those making larger contributions — but it could also impact “regular” savers if employers reduce benefit generosity in response.
Employers face a trade-off: maintain generous pensions (but absorb higher NIC costs), or scale back — which could reduce how attractive their compensation and benefit packages are, especially for recruitment and retention.
There’s increased complexity and administrative burden — especially for smaller firms already juggling tight budgets and resources.
🧮 What You (or your Employer) Should Consider Doing — Now or Before 2029
If you expect to contribute more than ~£2,000 per year, review your pension contributions: evaluate whether to continue salary sacrifice, reduce the amount, or switch to direct employer pension contributions.
Employers should start assessing the long-term cost of keeping salary-sacrifice pension schemes, factoring in NIC increases, payroll changes, and staff communication.
Consider alternative pension “vehicles” or contribution structures that might remain more favourable under the new rules.
Keep an eye on official guidance (from HM Revenue & Customs and related bodies) — some details (especially around implementation & reporting) might evolve ahead of 2029.