Budget 2025: Pension salary sacrifice changes explained

The Government has announced a new limit on how much workers can save into a pension salary sacrifice scheme. Here’s what you need to know. 

The changes announced in the 2025 Budget for pension salary sacrifice could reshape how workers save for retirement.

The Government proposes to cap the amount of pension contributions made via salary sacrifice that are exempt from National Insurance contributions (NICs). 

Under the new rules, from April 2029 only the first £2,000 of salary-sacrificed pension contributions would remain free of NICs. 

Any amount above that threshold would become subject to standard NIC charges for both employer and employee.

What is salary sacrifice and how has it worked

Salary sacrifice is a mechanism by which an employee agrees to give up a portion of their salary, which an employer then contributes directly into a pension scheme. 

Because this contributed amount bypasses the employee’s take-home pay, neither the individual nor the employer pays NICs on it. This has made salary sacrifice an effective way to boost pension contributions, while reducing tax and NIC costs.

Under current rules, contributions made through salary sacrifice can count toward the standard annual allowance for pensions.

What the 2025 Budget changes

The 2025 Budget introduces a cap: from April 2029, only the first £2,000 of pension contributions made via salary sacrifice will be exempt from NICs. 

Contributions beyond £2,000 will be treated like ordinary salary for NIC purposes, meaning both employee and employer will pay NICs as usual.

The Government justifies the cap by pointing out that the cost of providing NIC relief on salary sacrifice has been rising rapidly. The cap is positioned as part of a broader effort to make the tax system fairer and more sustainable.

At the same time, the Government emphasises that core pension saving incentives remain. Auto enrolment, income tax relief on pension contributions, and existing pension allowances remain unchanged.

Likely impact on workers and long-term savings

For many workers the changes may have a modest effect. The Budget notes that around 74% of basic-rate taxpayers who use salary sacrifice are expected to be unaffected by the tweaks.

However for others, especially those who sacrifice substantial amounts of salary into their pension, the cap could significantly reduce the attractiveness of salary sacrifice. 

That group includes individuals on middle to higher earnings who use salary sacrifice to maximise pension contributions while minimising NICs. Over time, the extra cost could lead to smaller pension pots.

Employers may also adjust. Surveys by industry bodies suggest that if the cap is implemented, roughly one in three firms might cut their pension contributions, and nearly half could reduce other employee benefits.

There is concern among pension professionals that the change could discourage long-term retirement saving for many, undermining confidence in defined contribution pension schemes.

What it means for retirement planning

Employees who rely on salary sacrifice should review their pension arrangements. Once the cap is enforced in 2029, making additional contributions directly (outside salary sacrifice) may become more cost-effective. Direct personal contributions with tax relief remain available, subject to the existing annual allowance.

For employers, there is a need to reconsider workplace pension schemes. They may need to communicate changes clearly and possibly rework benefit packages to maintain attractiveness. Employers might absorb some additional costs, but many may shift burdens onto staff or reduce pension offers altogether.

The change also underscores a broader shift in Government policy: trimming tax and NIC benefits associated with pensions for higher earners, while preserving the basic structure of pension relief and auto enrolment aimed at encouraging general saving and retirement provision.

Broader consequences

One risk is that some workers reduce their pension contributions if salary sacrifice becomes less attractive. That could widen retirement savings gaps, especially among higher earners who currently rely heavily on salary sacrifice to build larger pension pots.

Another concern is employer cost. Increased NIC burdens on employers may incentivise cutting back on pension contributions or other benefits, or in some cases discourage firms from offering salary sacrifice pension schemes at all.

There is a wider societal risk. If many people reduce pension saving, long-term retirement income levels could fall, increasing future reliance on state pension provision. That would place greater pressure on public finances and potentially reduce older people’s living standards in retirement.

Finally, the delayed start date (2029) means many individuals and employers have time to adapt. But it also creates uncertainty: decisions made now (e.g., opting out of salary sacrifice or increasing direct contributions) may need revisiting as the rules come into force.

The 2025 Budget’s changes to pension salary sacrifice mark a significant change in how tax relief on pensions is delivered. By capping NIC-exempt pension contributions at £2,000 per year from 2029, the Government aims to curb rising costs and what it sees as making the tax system fairer. 

For many workers the impact may be limited. For others, particularly those making larger pension contributions via salary sacrifice, the change could reduce the tax efficiency of pension saving and lead to reduced pension pots over time.

The reform could weaken the long-term incentive to save into pensions for some, complicating retirement planning and potentially increasing future reliance on state support.