How will the changes to pensions salary sacrifice in the Budget 2025 affect my business?

There was a change to the rules around making pension contributions through a salary sacrifice arrangement in Chancellor Rachel Reeves’ Budget on 26th November 2025. We set out what that change is, who it will affect and what it means for you. 

For a summary of all the key Budget 2025 announcements affecting you and your business, see our article here.  

What is salary sacrifice for pension contributions? 

Employee pension contributions are tax-free but not free of National Insurance Contributions (NICs), whereas employer pension contributions are free of both tax and NICs.

Salary sacrifice for pension contributions is an arrangement where the employee agrees to give up some of their salary in exchange for an extra pension contribution from their employer. The result is that both parties save NICs. 

What was the change to the rules? 

Previously salary sacrificed pension contributions were uncapped but the Government has announced a new £2,000 per year cap on the amount employers can contribute to their employee’s pension under a salary sacrifice scheme from 6th April 2029.  

How does it affect employees? 

Employees who currently have their pension contributions made via a salary sacrifice scheme will have increased employees’ NICs to pay compared to now. 

Salary-sacrificed pension contributions above the new £2,000 cap will be treated as ordinary employee pension contributions and therefore will be subject to both employers and employees’ NICs.  

How does it affect employers? 

Employers who currently make pension contributions for their employees via a salary sacrifice scheme will have increased employer’s NICs to pay compared to now. Employers will also need to consider communications with employees, so that they understand the reason for the reduction in their take-home pay once the new cap applies.  

It is important to note that ordinary (i.e. non-salary sacrificed) employer pension contributions will remain exempt from NICs.  

The Office of Budget Responsibility (OBR) notes that it is possible to replicate salary-sacrifice schemes through an agreement to reduce wages and increase employer pensions contributions. However, this would be constrained by Operational Remuneration Agreement rules and employment law, so would need to be agreed with the entire workforce.  

As 2029 is some way off, we anticipate further changes and possible anti-avoidance legislation may be introduced before this date. Either way, 2029 provides a window for employers and employees to adapt to this proposed change.  

How does it affect a single director limited company? 

The new cap should not generally affect single director companies. To be a salary sacrifice scheme, there must be a contractual agreement to reduce an employee’s salary and for the employer to make an employer pension contribution instead. A company contribution to its director’s pension scheme would not be a salary sacrifice unless it was made as a change to the terms of the director’s employment contract with the company.  

As a sole director of a limited company, you can choose to make personal contributions to your pension scheme, for the company to make contributions to your pension or a combination of both.  

Generally, company contributions will be more efficient as they are an allowable expense against the company’s corporation tax bill and there is no income tax or NICs (employer’s and employee’s) to pay on the pension contribution. 

First published 27 Nov 2025

Share

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

---