Last updated: December 2025.
What is salary sacrifice?
Salary sacrifice is an arrangement in which an employee agrees to give up part of their gross (pre-tax) salary in exchange for an equivalent non-cash benefit from their employer, most commonly an employer pension contribution. Because the salary sacrificed is never paid to the employee, neither the employee nor the employer pays National Insurance Contributions (NICs) on it.
For pensions, this gives a double saving:
- Employee saves: Income Tax (20%/40%/45%) plus employee NI (currently 8% on earnings up to the upper earnings limit, 2% above)
- Employer saves: Employer NI (currently 15% on earnings above the secondary threshold)
This NI saving is what is being capped from 2029. The income tax relief on pension contributions is unchanged.
At a glance: what is changing in 2029
| Element | Now (until April 2029) | From April 2029 |
|---|---|---|
| Income tax relief on pension contributions | Full (at marginal rate) | Full (unchanged) |
| Employee NI relief via salary sacrifice | No cap | Capped at £2,000/year of salary sacrificed |
| Employer NI relief via salary sacrifice | No cap | Capped at £2,000/year per employee |
| Annual pension allowance | £60,000 (most people) | Unchanged |
Above the £2,000 cap, both employee and employer NI apply at standard rates. Income tax relief on the contribution is unaffected.
Who will be most affected?
Three groups feel the change most.
1. Higher earners making large workplace pension contributions
If you sacrifice £10,000–£60,000 a year into your pension to maximise tax-efficient saving, the additional NI on the amount above £2,000 increases the effective cost of those contributions.
2. Employers offering generous workplace pension schemes
Many employers run matched or enhanced salary sacrifice schemes specifically because the employer NI saving (currently 15%) more than pays for the administrative cost. With the cap in place, that calculation changes.
3. Senior executives using bonus sacrifice
Many senior staff sacrifice all or part of an annual bonus directly into pension to stay within tax-efficient bands and avoid the personal allowance taper above £100,000 income. The cap reduces, but does not eliminate, the value of this approach.
People making smaller, ongoing contributions (5–8% of a £30,000–£60,000 salary, much of it under £2,000/year in sacrificed amount) are largely unaffected.
How big is the financial impact?
The size of the impact depends on how much you currently sacrifice above £2,000. A simplified example for a higher-rate (40%) taxpayer earning over the upper earnings limit, sacrificing £15,000 a year:
Now (no cap):
- £15,000 goes into pension
- Employee saves: 40% income tax + 2% NI on the sacrificed amount
- Employer saves: 15% NI = £2,250 (often reinvested into the pension or shared with the employee)
From April 2029 (£2,000 cap):
- £15,000 still goes into pension; income tax relief unchanged at £6,000 (40%)
- Employee NI saved only on the first £2,000 sacrificed
- Employee NI charged on the additional £13,000 = approximately £260
- Employer NI saved only on first £2,000 = £300
- Employer NI charged on the additional £13,000 = £1,950
For this individual, the change adds around £2,200 of NI cost across employee and employer that was previously saved. The income tax relief stays the same.
These numbers are simplified and depend on actual earnings, NI bands, and the specific scheme structure. They illustrate direction of travel, not a precise figure for any individual.
What if I am a basic-rate taxpayer making small contributions?
You are unlikely to be materially affected if your salary-sacrificed pension contributions are around £2,000 a year or less, which covers many basic-rate earners contributing 5–8% of their salary. Income tax relief on pension contributions is unchanged.
What can employees do to prepare?
The cap takes effect from April 2029, giving time to review. Sensible steps include:
- Confirm whether your employer offers salary sacrifice at all, many smaller employers do not
- Review your overall pension contribution level, is it still on track for your retirement target? See our retirement preparation guide
- Consider whether to continue contributing at the same level even with reduced NI relief, income tax relief alone often justifies it, especially for higher-rate taxpayers
- Explore alternative routes, personal pension contributions (still get income tax relief), ISA contributions (no tax on growth or withdrawals, but no upfront relief), or General Investment Account where you have used your other allowances
What can employers do to prepare?
Employers running salary sacrifice schemes should consider:
- Reviewing scheme economics, the value of the employer NI saving falls, which may change the case for matching or topping up schemes
- Communicating clearly with employees before April 2029 about what the change means in practice for take-home pay and pension contributions
- Reviewing other salary sacrifice arrangements (cycle-to-work, electric vehicle schemes, holiday purchase), the 2025 Budget changes focus on pension sacrifice, but it is worth confirming the full set of arrangements remain efficient
Does the cap affect existing pension contributions?
No. The £2,000 cap applies to NI relief from April 2029 onwards. Any contributions made before that date are unaffected by the new rule.
Frequently asked questions
Will my income tax pension relief change too?
No. The cap is only on the National Insurance relief that salary sacrifice provides. Income tax relief on pension contributions, whether by salary sacrifice, payroll deduction, or relief at source, is unchanged.
Does this affect the £60,000 annual allowance?
No. The annual allowance remains £60,000 for most people, tapered down for high earners with adjusted income over £260,000. The salary sacrifice cap is a separate change affecting how the contributions are made, not how much you can put in.
Will employers stop offering salary sacrifice schemes?
Most will not. The income tax relief is unchanged, and salary sacrifice remains an efficient route for the first £2,000 a year plus simpler administration. Some employers may review their scheme design but few are expected to remove sacrifice altogether.
Are bonus sacrifice arrangements affected?
Yes, the cap applies regardless of whether the sacrifice is monthly, ad hoc, or from bonus. A £20,000 bonus sacrificed to pension would have NI relief on the first £2,000 only.
When does the cap start?
April 2029. The change was announced in the November 2025 Budget.