Pension salary sacrifice: what’s changing and what do I need to do?

Andrew Timpson, Employment tax partner, RSM. Croner-i

Sweeping changes to salary sacrifice pension rules will hit both employers and pension savers but are there any ways to mitigate the tax hit? Andrew Timpson, employment tax partner, and Aimee Pain, assistant manager at RSM, consider the impact of the new £2,000 limit.

Currently, where pension contributions are made under a salary sacrifice arrangement, these are exempt from national insurance contributions (NIC), but this will change in future. So, what’s changing, and how will people need to prepare?

In the 2025 Budget, the government announced that from April 2029 onwards, only the first £2,000 of an employee’s salary sacrifice pension contributions will be exempt from NICs in each tax year.

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.

How will this affect employees?

Although the government policy paper states that 56% of employees participating in pension salary sacrifice arrangements will not be impacted by this change, it’s important to understand how it will affect impacted employees, including those who are currently unable to participate in such an arrangement.

Scenario A

Alfred earns £35,000 per tax year and under a salary sacrifice arrangement, sacrifices 5% of his salary, in line with the current pension auto enrolment guidelines.

As Alfred will have sacrificed £1,750 of salary during the tax year, which is less than the £2,000 cap imposed from April 2029 onwards, there will be no NICs to pay on the resulting pension contributions.

Scenario B

Beth earns £80,000 per tax year and is looking to save as much as possible for retirement, sacrificing 20% of her salary (£16,000).

Based on the current Class 1 NIC rates, Beth would need to pay 2% NIC on the salary sacrificed over £2,000 (£280) and her employer would need to pay 15% NIC (£2,100).

Scenario C

Charles earns £26,000 per tax year (based on a 37.5 hour working week) and is unable to participate in his employer’s pension salary sacrifice arrangement. This is because if he sacrificed 5% of his salary, in line with the current pension auto enrolment guidelines, this would bring him below the national minimum wage (NMW).

Charles can therefore not take advantage of the NIC savings associated with salary sacrifice arrangements.

Although there has been much discussion and speculation around an exemption to the NMW for pension salary sacrifice purposes, this is yet to be confirmed by the Government. Doing so would remove the current unfair disadvantage for lower paid employees and should certainly be given further consideration.

How will this affect employers?

As demonstrated in the scenarios above, 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.

Similarly, where pension contributions are made under a salary sacrifice arrangement, some employers choose to share their Class 1 NIC savings with the employee via further pension contributions.

Where contributions exceed the £2,000 cap, the amount of NIC saved under such an arrangement will change. Employers must therefore consider the impact this may have on any contracts and employee communications.

Employers that are considering stopping such enhanced employer pension contributions, or sharing their NIC savings, will need to consider the legal implications of doing so.

What are the opportunities?

It’s worth noting that this change is not being brought in until April 2029 so there’s a possibility that it may not be enacted in its current proposed form. As a result, there is still an opportunity for employees and employers to utilise the current tax and NIC reliefs in the meantime.

Enhanced pension contributions

Where employees are looking to maximise their pension, there is an opportunity to increase pension contributions prior to April 2029 to gain as much benefit as possible from the current rules.

Implementation of salary sacrifice arrangements

Although this change reduces the amount of NIC relief available on pension salary sacrifice arrangements from April 2029, it is still several years away, and leaves plenty of time to utilise the current reliefs.

This means employers that don’t currently operate a pension salary sacrifice arrangement may consider implementing one. Even where a salary sacrifice arrangement is already in place, employers may wish to consider taking steps to increase employee uptake, so they can get the most benefit possible from the current tax reliefs.

About the authors

Andrew Timpson, employment tax parter, and Aimee Pain, assistant manager, RSM UK