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From April 2029, salary sacrificed pension contributions will be capped, with any excess attracting National Insurance.
15 December 2025
From April 2029, salary sacrificed pension contributions will be capped at £2,000 per year, with any excess attracting National Insurance for both the employee and employer.
We take a look below at what this will mean for employers and employees.
In the Autumn 2025 Budget, the Chancellor announced that salary sacrificed pension contributions would be capped and any contributions over that cap will be subject to both employee and employer NICs.
That means pension contributions made under the scheme that exceed the cap will be subject to both employer and employee NICs at 15% and 8% respectively for earnings under £50,270 and employees at 2% on income above that level.
The draft legislation is contained in the National Insurance Contributions (Employer Pensions Contributions) Bill, introduced to Parliament on 4 December 2025. There will be a period of consultation to follow.
Salary sacrifice is when you agree to reduce your gross salary or sacrifice a bonus and, in return, your employer pays the same amount into your pension. It is a popular work benefit.
The introduction of the cap will complicate tax issues for both employers and employees and there may well be some move away from salary sacrifice schemes in future as a result, leaving the question open as to what other incentives employers can offer and what employees will accept, and what incentives remain for employees to save into a pension for their future.
Employers will also need to review their contracts of employment to ensure they reflect any changes.
Although the cap will not be in place until April 2029, employers will need to plan ahead.
This may be particularly so if the rumours are correct that the 2029 start date for the cap may be brought forward to an earlier year to counter the likely front loading of contributions ahead of the cap's imposition.
From 6 April 2029, only the first £2,000 of employee pension contributions paid through salary sacrifice each year will be exempt from NICs. Contributions through salary sacrifice, like all pension contributions, will still be exempt from Income Tax.
Employers and employees can still make contributions above £2,000 through salary sacrifice arrangements, but the excess above this figure will be subject to NICs.
Employers will need to report the total amount sacrificed through their payroll software.
It is worth noting that all employer-made pension contributions will continue to be free of NICs.
Whilst employees making salary sacrificed pension contributions of up to £2,000 a year will not be affected, those who choose to make larger contributions will be caught.
It should be noted that there is nothing to prevent an employee from contributing as much as they wish into their pension outside of a salary sacrifice arrangement (i.e. from their net pay); it is only when using the salary sacrifice route that they may incur employee NICs.
According to government figures, between 7m-8m employees use salary sacrifice, so the change will have a major impact on revenue raising for the Treasury, unless workers and employers choose to adopt a different path.
High-earning employees will be most affected, particularly those who earn large bonuses and choose to have them paid directly into a pension.
The key to managing the change is preparation. Modelling the likely impact on payroll and employee benefit strategies will put employers in a stronger position.
We can help you assess the impact of the cap and plan practical steps to manage your employment costs effectively. It is also worth noting that salary sacrifice schemes remain of benefit where the employee pays in less than £2,000 a year into a pension via this route; it is still a tax-saving action.
Speaking to us early on can help identify tax efficiencies and planning opportunities to ease the financial pressure. Contact a member of our Employer Solutions team.
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