The government’s Autumn Budget in November 2025 was full of announcements surrounding government spending and fiscal decisions. One such announcement was the introduction of a cap to pension contributions made via salary sacrifice, from April 2029. In this article we’ll discuss salary sacrifice, and the current rules relating to pension contributions. We’ll also discuss the upcoming changes, and what they mean for employers.
What is salary sacrifice?
Salary sacrifice is a tax-efficient benefit offered by some employers. It is often used as an employee benefit when attracting new employees and to retain existing employees. With salary sacrifice, employees choose to give up part of their salary for a specific reason. This may include pension contributions, childcare vouchers and cycle-to-work schemes.
The sacrificed salary is deducted from the employee’s pay before tax is calculated. This means that, as their take-home pay is lower, the amount of income tax and National Insurance due is lower. The lower take-home salary for employees following salary sacrifice must not be below National Minimum Wage, however. For employers, a key benefit is lower National Insurance contributions (NICs). Some employers may choose to pay some or all of this saved NIC into the employee’s pension.
Salary sacrifice for pensions: Current situation
HMRC analysis prior to the Autumn Budget showed that 7.7 million employees used salary sacrifice for pensions in 2024. Currently, those contributing to their pensions by salary sacrifice can contribute without limit. All contributions are free from National Insurance for both the employee and employer. The contribution lowers the employee’s salary, meaning the amount that income and NI is paid on is lower.
Example:
An employee earns £2,000 per month and contributes £200 per month via salary sacrifice.
Income tax and National Insurance is due on £1,800 rather than £2,000.
Benefits for employers of salary sacrifice for pension contributions
Lower National Insurance is payable by employers due to lower employee salaries. Salary sacrifice is an additional employee benefit that can be used to attract new employees when recruiting. It is also beneficial to employers as it shows their support of employees’ retirement planning.
Benefits for employees of salary sacrifice for pension contributions
Using salary sacrifice is beneficial to employees too. More take-home pay and tax efficiency are clear benefits. It is also a way of building a larger pension pot for retirement.
Tax relief is different for salary sacrifice pension contributions compared to regular ones. For regular contributions, 20% tax relief is applied, boosting your contribution. For higher- and additional-rate taxpayers, the extra 20% or 25% tax paid can be claimed via self-assessment. Salary sacrifice pension contributions are counted as employer contributions, so are not eligible for tax relief. However, a form of tax relief is enjoyed through the savings gained by not paying NI on the contributions. For higher- and additional-rate taxpayers, this means the benefit is received immediately rather than requiring a self-assessment form to be completed.
Upcoming changes to salary sacrifice for pensions
As previously noted, in the November 2025 Autumn Budget, the Chancellor announced an upcoming cap to pension contributions made via salary sacrifice. From April 2029, a cap of £2,000 will apply to contributions in order to be exempt from NICs. This decision by the Chancellor is expected to raise £4.7bn in 2029/30 and £2.6bn in 2030/31.
Even after the 2029 change to salary sacrifice, all pension contributions will remain free from income tax. This is subject to the usual annual pension allowance. For many this is £60,000, though if you earn over £200,000 per year, you may be subject to a tapered annual allowance. Read more about how a tapered allowance may impact your pension contributions in our previous blog post.
What does the upcoming cap mean for employees?
Even after a cap is introduced from April 2029, pension contributions via salary sacrifice may surpass it. Contributions can continue beyond the cap, subject to annual allowances. However, employer and employee NICs will be due on the portion above the threshold, as this will be treated as an ordinary employee pension contribution.
Example:
Using the same details as in the previous example, an employee earns £2,000 per month and contributes £200 per month via salary sacrifice.
The total contributed is £2,400 per year.
This is £400 above the cap. National Insurance will be due on the amount above the cap.
I’m not contributing via salary sacrifice yet – should I start?
Pension contributions can be excellent, tax-efficient methods of building pension pots for retirement. Not all employers offer salary sacrifice to boost pension contributions. In fact, research by Everywhen found that just 48% of employers do. Even if your employer does offer it, you do not need to accept. You may choose to remain contributing via the regular workplace pension scheme, if eligible. Or you may choose to invest in a private pension scheme.
Deciding to join a salary sacrifice scheme requires some consideration. The reduction in your take-home salary may, for example, impact your eligibility for larger mortgages. Further, it may impact your entitlement for other benefits including Statutory Maternity Pay. Insurance policies, such as life insurance, may calculate pay-outs based on your salary too. This is why it is important to consider if salary sacrifice is the right choice for your pension contributions.
On the other hand, reducing your salary may be beneficial. Those earning over £100,000 will begin to lose their tax-free personal allowance of £12,570, at a rate of £1 for every £2 over £100,000 earned. Once you earn over £125,140, your personal allowance will be zero. In this instance, it may be useful to reduce your take-home salary, whilst also reaping benefits of saving tax-efficiently for your retirement.
I’m currently contributing via salary sacrifice – what should I do?
As an employee, the most you are able to do is speak to your employer. They will need to begin planning their next move when the cap begins. They may offer an alternative benefit, improve their workplace pension scheme offering, or simply decide the pay any due NICs. It’s worth remembering, there’s just under three years until the cap comes into force. So, there is still the opportunity to maximise savings for the next three years.
Will the cap definitely be introduced?
Until the start date, there is always a chance the policy will be squashed. The salary sacrifice for pension contributions cap is due to be introduced in April 2029. If the current government withstands and survives the current political turmoil, the next general election is likely to be in 2029. However, a new government, even if it is a different political party in charge, does not guarantee this policy will or won’t be introduced. Its cost-cutting nature may mean the policy is supported, no matter who is in charge. Alternatively, it may be delayed or cancelled altogether.
As of May 2026, there is a limited amount of information available about this change on the government website. Further guidance is still to be published. We will bring you any updates on this as they are released.
Next steps
You can read more about all the pension changes announced in the Autumn Budget in our blog post from December 2025. As always, Willday Wealth Management is here to offer our expertise, support and guidance on all matters pertaining to pension and ISA investments. We’ll help you find the most suitable and tax-efficient investment opportunities for your individual financial circumstances.
Call us on 0116 222 0119 or email us on hi@willdaywm.co.uk to begin the conversation.
