In the Autumn Budget 2025, the Chancellor announced a future change to salary sacrifice pension contributions. From April 2029, there’ll be a £2,000 cap on the amount you can contribute without paying National Insurance (NI).
Here’s how it works and what it could mean for you.
What is salary sacrifice?
Salary sacrifice is an agreement between you and your employer where you reduce or exchange part of your salary, and your employer pays the same amount into your pension. Because the contribution’s taken before Income Tax and NI, your official salary is lower and this may reduce the NI you and your employer pay.
The same idea can apply to bonuses, but that’s usually referred to separately as bonus exchange. Not all employers offer salary sacrifice, so it’s worth checking with your HR or payroll team to see if it’s available to you.
For many people, this arrangement can be a tax-efficient way to save more for retirement.
Who uses salary sacrifice?
Salary sacrifice is widely used across the UK, with around 8 million employees making salary sacrifice pension contributions in 2024, according to analysis by HM Revenue & Customs (HMRC).
Nearly half of UK private sector companies offer salary sacrifice, and the figure climbs to about 85% among larger employers. Uptake is much lower in the public sector, where only around one-in-10 workers use these schemes.
What’s changing from April 2029?
From April 2029, the government plans to cap the amount of salary sacrifice that’s exempt from NI at £2,000 per year. Here’s what that means:
the first £2,000 of salary sacrifice each year will stay NI-free;
any amount you sacrifice above £2,000 will be subject to employee NI (8% or 2% depending on your salary) and employer NI (15%);
Income Tax relief continues to apply to all pension contributions; and
employers can still contribute as much as they want directly to pensions without paying NI.
According to HM Treasury, the change is expected to raise £4.7 billion in 2029/30. In her Budget speech, the Chancellor highlighted that some employees currently sacrifice part of their bonus into their pension to reduce the NI they pay. The new measure is designed to limit the NI savings available on very large salary sacrifice contributions.
Who will the cut to salary sacrifice impact?
The change only applies if your annual salary sacrifice contributions exceed £2,000. If you sacrifice £2,000 or less each year, you won’t see any difference to your NI.
Here are a few examples:
if you contribute 5% on a £30,000 salary, that’s £1,500 a year - below the cap, so no impact;
the same applies if you contribute 5% on £40,000, which equals £2,000 exactly;
a 6% contribution on £35,000 comes to £2,100, so you’d be £100 over the cap;
an 8% contribution on £50,000 is £4,000 - that’s £2,000 above the threshold; and
if you contribute 10% on £60,000, you’d sacrifice £6,000 a year, putting you £4,000 over the cap.
Those who sacrifice more than £2,000 a year will pay extra NI on the amount above the cap.
How much could it cost you?.
Employee NI is charged at 8% on earnings up to £50,270, then 2% above that.
Below are examples of how the change could affect you.
| Your salary | What you contribute | Amount over £2,000 cap | Extra NI you’ll pay |
|---|---|---|---|
| £30,000 | 5% (£1,500/year) | £0 | £0 |
| £40,000 | 5% (£2,000/year) | £0 | £0 |
| £50,000 | 8% (£4,000/year) | £2,000 | £160 (at 8%) |
| £60,000 | 10% (£6,000/year) | £4,000 | £80 (at 2%) |
| £80,000 | 10% (£8,000/year) | £6,000 | £120 (at 2%) |
| £100,000 | 10% (£10,000/year) | £8,000 | £160 (at 2%) |
NI only applies to the amount over £2,000. If you earn under £50,270, you pay 8% NI. If you earn more, you pay just 2% NI.
What isn’t changing?
It’s helpful to remember what stays the same:
you’ll still likely receive tax relief on your pension contributions;
your employer can still make unlimited direct contributions without paying NI;
you can still use salary sacrifice for contributions above £2,000 - you’ll just pay NI on the amount above the cap; and
other salary sacrifice schemes, such as childcare or cycle-to-work, aren’t affected.
Why is the government making this change?
The Treasury says salary sacrifice has grown quickly in recent years and that most of the NI savings come from higher earners. The cap’s designed to limit those savings above £2,000, bringing them in line with other pension arrangements.
Do you need to do anything now?
There’s nothing you need to change today. The update won’t take effect until April 2029 and your employer will handle the payroll changes.
If you currently sacrifice more than £2,000 each year, you may want to:
work out your annual salary sacrifice by multiplying your monthly amount by 12;
check whether you’re above the cap and look at the potential NI costs;
speak with your employer if you’re considering changes to how you contribute; or
consult an Independent Financial Advisor (IFA) if you have complex circumstances.
This only applies to contributions made through salary sacrifice. Direct employee and employer contributions aren’t affected.
The bigger picture
Even with the new cap, pensions remain one of the most tax-efficient ways to save for retirement. You’ll still benefit from tax relief on all contributions, employer contributions, NI savings on the first £2,000 of salary sacrifice, and potential long-term growth through investing.
For most savers, the long-term benefits outweigh the additional NI costs some people may face.
Remember, you can still contribute to your pension privately, outside of salary sacrifice. If you’re a higher or additional rate taxpayer, you’ll need to reclaim additional tax relief through Self-Assessment. And many people simply don’t.
Between 2016/17 and 2020/21, £1.3 billion in pension tax relief went unclaimed. Over that five-year period, three-quarters of higher rate taxpayers eligible for relief failed to claim it - and almost half of additional rate taxpayers missed out too.
The takeaway is that salary sacrifice, even with the £2,000 cap, still makes claiming your full tax relief automatic and hassle-free.
You can use PensionBee’s Pension Tax Relief Calculator to find out how much tax relief you could get on your pension contributions.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
