Salary sacrifice for pensions explained

We look at pension salary sacrifice schemes and what companies can do between now and April 2029 when this rule change is proposed to start.  

What is salary sacrifice for pensions? 

Salary sacrifice is a mechanism where an employer and employee agree that the employee will give up some of their salary in return for the employer providing them with a benefit instead. This could save income tax and NICs for the employee and employer. 

Historically employers could offer salary sacrifice schemes for many benefits, but the Optional Remuneration Arrangements (OpRA) rules since 2017 removed the tax and NICs advantages for most benefits. Pension contributions is one of the few remaining salary sacrifice opportunities.  

While employee pension contributions already attract income tax relief, when the employee gives up an amount of their salary broadly equal to their workplace pension contribution and in return the employer puts in a larger employer contribution, Class 1 NICs (employee’s and employer’s) are also saved on the salary foregone.  

Employer pension contributions are exempt from NICs and tax deductible for the employer against: 

• income tax if the employer is a sole trader, or  
• corporation tax if the employer is a company.  

Many employers use pensions salary sacrifice as a crucial part of their tax planning. 290,000 employers utilise pension salary sacrifice currently, with an estimated 7.7 million employees in those schemes. 

What will change from April 2029? 

In the Autumn Budget on 26th November 2025, the Chancellor Rachel Reeves announced that pensions salary sacrifice would be capped from 6th April 2029. Only the first £2,000 of pension contributions per employee made through salary sacrifice will be free of NICs (employee’s and employer’s) each year.  

Employers and employees can continue to use existing salary sacrifice arrangements to make pension contributions, but everything over £2,000 per year will be subject to NICs.  

Standard employer pension contributions – i.e. those not made via salary sacrifice – will remain exempt from employer’s NICs. 

For those using pensions salary sacrifice schemes and making more than £2,000 of pension contributions per year, this will mean a higher NICs bill for both the employer and employee.  

Why are the changes being introduced? 

The introduction of a cap to the amount of pension contributions that can be made free of NICs was part of a wide range of tax revenue-earning measures the Government announced in its Autumn Budget 2025. As salary sacrifice was largely outlawed for other employee benefits in 2017, a change for pension contributions had been rumoured for some time.  

Not all employers or employees can take advantage of pensions salary sacrifice so there was concern that there was an uneven playing field for taxpayers. However, with increasing life expectancies and state pensions being the largest part of the Government's welfare benefits bill, the Chancellor was concerned not to discourage workers from saving for their retirement. In addition, a £2,000 cap ensures that higher paid workers do not receive excess relief from NICs while lower paid workers retain the benefit.  

What does this mean for employers? 

This means that it’s important for employers to look at the effect this could have on their business in advance and consider any future actions required. But it is also crucial to note that the change is not due to take place until April 2029 and will need new legislation to take effect. This means there is a three-year period to continue using pensions salary sacrifice and make plans before the proposed cap begins. 

Note that if you are considering a reduction to wages and increased employer pension contribution without a salary sacrifice arrangement, the OpRA rules and employment law mean all-employee consultation and agreement would be required – this would be a significant task to undertake.  

What does this mean for employees? 

Employees who currently make pension contributions through salary sacrifice may have more NICs to pay, meaning less take-home pay overall.  

For employees who make traditional pension contributions – i.e. they contribute a percentage of earnings, and their employer contributes a percentage of their earnings – there will be no change.  

In addition, employees whose overall pension contributions through salary sacrifice are £2,000 or less will see no change and those who are only a small amount over £2,000 will only pay NICs on the salary which funds the excess over £2,000. 

In the meantime, if your employer offers a pension salary sacrifice scheme, it could be worth reviewing your pension contributions and making higher contributions now while it remains NICs-efficient.  

What practical steps can my business take to prepare before April 2029? 

There are several worthwhile actions to consider before the proposed change takes place in April 2029: 

• Continue to use pensions salary sacrifice schemes normally or even begin to offer salary sacrifice for pensions while it remains cost-efficient. 
• Prepare cashflow forecasts and modelling to assess the effects of the change on payroll costs. 
• Look at possible changes to the structure of pensions contributions made. 
• Plan communications about pensions and the changes to employees. 
• Review payroll software to ensure it can accurately deal with the change. 
• Consider that Government policy could change. 
• The proposed cap could be dropped entirely. 

TaxAssist Accountants – how we can help 

Need help understanding the pensions salary sacrifice changes and how your business should prepare? TaxAssist Accountants has lots of experience helping employers with payroll obligations and explaining tax changes clearly. Call 01480 592 002 or use our online form here. 

Last updated: 16th February 2026