Salary sacrifice has long been one of the most tax-efficient ways for employers and employees to pay into a workplace pension.
However, those benefits are set to be reduced following the changes announced in the Autumn Budget 2025.
A recent OBR analysis indicated that around 4.3 million more people than expected will feel the impact and employers and employees must understand how to prepare.
Under the current system, pension contributions made through salary sacrifice are exempt from Income Tax and National Insurance Contributions (NICs).
This benefits employees and employers by reducing payroll costs and the overall tax on pension contributions.
However, from April 2029, this exemption is set to change.
The Autumn Budget announced that only the first £2,000 per year of pension contributions made through salary sacrifice will remain exempt from NICs.
Any contributions above this level will be subject to employee and employer NICs, although all pension contributions will continue to receive full Income Tax relief.
Employees who sacrifice more than £2,000 each year will see NIC deducted on the excess and could reduce their take-home pay compared to the current rules.
Lower and middle earners could be amongst those heavily affected, as those earning below the higher-rate tax threshold could pay NIC at up to eight per cent on contributions above the cap, while higher earners will pay two per cent.
Despite this, pension contributions will continue to reduce adjusted net income and help people avoid higher-rate tax and the £100,000 personal allowance taper.
From April 2029, employers will face additional NICs costs on salary sacrifice pension contributions above £2,000.
This could potentially increase payroll costs, especially for businesses with high pension participation or generous contribution matching.
Employers who share their NIC savings with employees or offer greater pension contributions may need to reconsider whether these arrangements remain affordable.
Some employers may also need to reconsider their contribution structures and bonus sacrifice arrangements ahead of the implementation.
Any changes made must be handled carefully and employees must be fully informed, as pension and salary sacrifice arrangements are often included in employment contracts.
Employers will need to reassess the financial implications on their payroll and seek financial support to review the impact on their cash flow.
Although the salary sacrifice changes may feel far away, early planning is essential and waiting until the last minute could limit your options.
Employees should be reviewing how much they contribute to their pension and potentially increase contributions while the full NI relief is still available.
Employers should begin modelling the cost of employer NIC on salary sacrifice contributions above £2,000.
This includes reviewing contribution matching policies, bonus sacrifice arrangements and whether current pension contributions are sustainable once the new rules apply.
Clear communication is crucial as employees are likely to have questions over how the reforms will affect their take-home pay and retirement savings.
The salary sacrifice reforms could potentially change, as we still have a few years until they come into effect.
With expert financial support, employees can assess how the cap will affect take-home pay and employers can ensure their contributions are sustainable and compliant.
We want to help you make informed decisions on your pension contributions and understand how they affect your long-term financial planning and workplace pension schemes.
For further advice and support on the salary sacrifice changes, contact our team
