Salary sacrifice tax break on workplace pensions cut to £2,000

What is salary sacrifice?

Salary sacrifice is a way to make pension contributions by mutual agreement between employees and employers. Effectively the employee’s contract is being amended to reduce salary in exchange for increased contributions made by the employer to a pension.  This means that not only do you get the usual income tax relief, but you also benefit from savings on NICs. In most cases employers pass on some or all their savings to the employee. It’s a win-win for the employer and employee as they both make NIC savings.

As with all pension contributions, it can be useful for lowering someone’s adjusted net income which is used for various tests, for example to beat the 60% tax trap, or to gain child benefit or tax-free childcare.

About a third (30%) of private sector employees and a tenth (9%) of public sector workers use a salary sacrifice arrangement for their pension savings, according to the Office for National Statistics.² 

What is changing?

Pension savers and retirees will be breathing a sigh of relief that there were no changes in the Budget to the pension tax-free lump sum, or to pension tax relief.

However, as widely trailed in the run-up to the Autumn Budget, Reeves did make changes to salary sacrifice.

From April 2029, the amount that is exempt from NICs will be capped at £2,000 a year for employee contributions made via salary sacrifice.

There is currently a much higher limit in terms of how much can be put into someone’s pension pot.

The pensions annual allowance is the maximum amount that can be paid into a pension each tax year. This Includes contributions from you, your employer, any third party as well as tax relief paid to the pension. The current annual allowance is £60,000.

However, you'll only personally get tax relief on contributions up to 100% of your earnings if your earnings are less than the £60,000 annual allowance, or £3,600 - whichever is lower - in each tax year. Unused annual allowance can generally be carried forward for three years if not used.

Employees will still be able to contribute as much as they want to their pensions, including via salary sacrifice, once the changes come into effect. And these contributions will be exempt from income tax in the normal way.

However, any pension contributions via salary sacrifice above £2,000 will be subject to employer and employee NICs.

The government says that employees will not need to do anything; rather, employers will make the necessary changes so that NICs apply to contributions above £2,000.

How much could pension savers using salary sacrifice lose?

Both employers and employees could face bigger tax bills as a result of the Budget change.

Analysis shows that someone earning £60,000 sacrificing 5% of their salary stands to lose £20 a year in increased employee NICs from April 2029, while the employer would face an additional cost of £150.

For someone on £90,000 sacrificing the same 5%, the employee NIC would rise by £50 a year with an additional cost to the employer of £375.

In contrast, those earning £40,000 or less who give up 5% of their salary will not face a cost, and nor will their employer.³ 

Critics say the move will lead to higher costs for companies, and could potentially lower morale among employees, disincentivise wage ambition and reduce pension saving.

However, it’s important to point out that if you currently save into a pension via salary sacrifice it will likely still be the best option for you versus not using salary sacrifice. This is because you’ll still benefit from the income tax relief and up to £2,000 of National Insurance relief. This means you will save money compared to if you didn’t use salary sacrifice.

Claire Trott, Head of Advice at St. James’s Place, says: “The reality is that this is a headline for some but not necessarily for the many. Not all workplace schemes offer salary sacrifice and, even with the changes, pensions are still a fantastic savings vehicle that offer real tax benefits.”

Why has the government announced this change?

Governments have a habit of tweaking the pension rules to generate revenue. At last year’s Budget, Reeves announced that pensions would be subject to inheritance tax from April 2027.

Now, pension savers will have to brace themselves for more changes happening two years later, when a salary sacrifice cap is introduced in 2029.

Reeves said in her speech: “Salary sacrifice for pensions, which was intended to be a small part of our pensions system, is forecast to almost treble in cost from £2.8 billion in 2017 to £8 billion by 2030.”

She said that the highest earners and “those in the financial services sector putting their bonuses into pensions tax-free” benefited the most from the arrangement. “This is not sustainable for the public finances […] and so I am introducing a £2,000 cap on salary sacrifice into a pension.”

According to the Budget document, almost three-quarters (74%) of basic-rate taxpayers using salary sacrifice will be unaffected by the cap.⁴ 

Talk through your pension options

Keeping on top of the pension rules can be tricky – and especially so when the chancellor routinely tweaks them at each Budget.

A financial adviser can explain the changes to salary sacrifice and work out the best way for you to save for later life, helping you maximise your savings and achieve your retirement dreams.

With these announcements adding yet more complexity to financial matters, the importance – and value – of financial advice has never been as clear. Find a financial adviser today.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation and reliefs from taxation can change at any time. Tax relief is dependent on individual circumstances.

Sources

¹ Gov.UK - Line 52 in 5.1 Table 4.1 Budget 2025 policy decisions
²Office for National Statistics - Public and private sector earnings: 2019
³Calculations made by St. James’s Place, 27 November 2025
⁴Gov.UK - Budget 2025 (under 1.3)