Millions of workers across the UK are set to lose a key pension tax perk under new Government rules that will limit National Insurance (NI) savings on salary sacrifice contributions. Changes confirmed in the 2025 Autumn Budget mean that from April 2029, only the first £2,000 of employee pension contributions made through salary sacrifice will be exempt from NI. Anything paid above that threshold will attract both employee and employer National Insurance.
The reform is expected to affect around 3.3 million people who currently contribute more than £2,000 a year via salary sacrifice. Salary sacrifice allows workers to exchange part of their gross pay for employer pension contributions before tax and NI are calculated.
Because deductions are made before NI is applied, both employees and businesses benefit from lower contributions, making it one of the most efficient ways to build retirement savings.
However, from 2029, pension contributions will still receive income tax relief, subject to existing limits, but only the first £2,000 sacrificed each year will avoid National Insurance. Contributions above that amount will be treated like other workplace pension payments for NI purposes.
The Government said the move is designed to make the system fairer and more sustainable. It said: “This change limits the benefit of salary sacrifice arrangements, which have grown significantly in recent years.
“The costs of relief through salary sacrifice relate disproportionately to pension contributions from those on higher incomes. It makes the system fairer and more sustainable, and means that any salary sacrificed above the £2,000 cap is treated the same for tax purposes as other pension scheme arrangements. Most employees making typical pension contributions and their employers will be unaffected.”
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Some experts have said the consequences extend beyond employees. Employers will also face higher NI bills on pension contributions above the cap and may need to rework payroll systems and contribution models well ahead of the 2029 deadline.
Chris Eastwood, CEO of Penfold, warned: “Salary sacrifice has been a win-win for employers and employees for years lowering National Insurance costs while strengthening retirement savings.
“Anyone contributing more than £2,000 a year through salary sacrifice will lose NI savings on the excess, and employers will see their NI costs rise accordingly.”
He added: “Businesses need to start modelling the financial impact now and ensure they communicate clearly with staff well ahead of implementation.
“For employers not yet using salary sacrifice, there remains a significant opportunity to capture NI savings before 2029.”