Plan for salary sacrifice cap on pensions creates widespread uncertainty for employees as more than one in 10 companies already decide to end use.

The measure announced at Budget 2025 introduces a £2,000 salary sacrifice cap on pension contributions forcing employers to review their current arrangements and risking further employer pullback.

Research by the Standard Life Centre for the Future of Retirement found two in five (39%) employers offering salary or bonus sacrifice schemes said they were less likely to provide the scheme when the National Insurance relief cap comes into force. 

One in 10 (11%) have already decided to withdraw their salary sacrifice scheme completely since Budget decision.

The chancellor’s decision to impose the salary sacrifice pension cap is set to affect an estimated 3.3 million employees with over 300,000 companies currently offering the scheme to staff.

Although the £2,000 annual cap on employee and employer National Insurance contributions (NIC) relief for salary sacrifice schemes will not come into effect until April 2029, companies are already questioning whether it makes sense to continue running their pension schemes as salary sacrifice.

The Standard Life poll of 500 business leaders found the new salary sacrifice cap was ‘likely to have a significant impact on employee pension saving’.

Nearly two thirds of (65%) employers say they currently offer either salary sacrifice or bonus sacrifice schemes, with a third (32%) offering both, Standard Life research showed.

Leaders of small businesses (10-49 employees) were most likely to say that the tax-free cap on salary sacrifice schemes would impact them, with half (49%) saying they would be less likely to offer the scheme in the future.

Catherine Foot, director of the Standard Life Centre for the Future of Retirement, said: ‘The UK has a widespread under-saving problem. Current minimum workplace pension auto-enrolment levels are insufficient, with 15m people currently heading for financial insecurity in retirement.

‘The cap on salary sacrifice schemes will end up worsening this crisis by creating additional cost barriers that disincentivise employers from offering the scheme, with significant implications for their employees’ ability to save.

‘Our analysis finds that middle and high earners will have a double whammy – impacted by extra costs themselves, along with high payroll costs for the employer.

‘Ideally Government would have waited to hear the initial evidence from the Pensions Commission which will soon set out the evidence on the scale and nature of under-saving before pressing ahead with this change.’

Effect of changes to salary sacrifice

Source: Standard Life

The Treasury has ruled out any changes to the proposed cap, rejecting calls by the House of Lords for an amendment to raise the cap to £5,000 in the National Insurance Contributions (Employer Pension Contributions) Bill, and will not produce a further impact assessment to understand the scale of any behavioural change.

With several years until the measure is enacted, employers need to review their current pension arrangements and consider whether it still makes economic sense to offer salary sacrifice pensions to staff. There will be increased costs for business as they lose the current NI tax break, which the government says is ‘unaffordable’, costing £4.7bn a year based on Treasury costings released at the Budget.

Andrew Timpson, employment tax partner at RSM, said: ‘Where salary is sacrificed over this £2,000, the extra contributions will be subject to both Class 1 primary and secondary NICs. Pension contributions will continue to be exempt from income tax, including those exceeding the £2,000 NIC relief cap.’

‘This change will not only result in additional NIC costs for employees, but also for employers. In fact, as a result of the current NIC rates, this change could lead to a significantly higher liability for employers than for employees.

‘It will therefore be crucial for employers to undertake illustrative calculations to understand the effect this change may have on their business from April 2029 onwards.

‘Although some employers may only make employer pension contributions of the minimum 3% required under pension auto enrolment guidelines, others may make more generous contributions, including the matching of any employee contributions over and above the minimum 3%.

‘These employers may find that following the introduction of NICs on employee contributions over £2,000, it will no longer be financially viable to do so.’

While curbing pension salary sacrifice will give the Treasury a nearly £5bn tax relief saving, but the wider impact on pension saving levels raises concerns. It is also yet another hit to businesses.

Gail Izat, managing director for workplace at Standard Life, said: ‘Businesses are struggling with difficult economic headwinds and increased costs across the board, meaning that further costs or administrative barriers are a huge disincentive to continuing to offer these schemes.

‘They also need further detail on implementing these changes as complex and unclear processes may further discourage them offering salary sacrifice.’