After weeks of rumour and speculation, the Chancellor unveiled the much-trailed changes to the salary sacrifice of pension contributions in her speech on 26 November 2025. The reforms are proposed to take effect from April 2029.
Whilst this may seem a more than sufficient lead in, both employers and trustees of occupational pension scheme have a lot to consider and implement prior to the changes coming into force.
Salary sacrifice of pension contributions
Salary sacrifice has been embedded into the pensions system for decades as an efficient means of pension saving. To date the amount employees are able to sacrifice has not been capped in any way (save for the overall annual allowance limit on pension savings).
In basic terms, salary sacrifice involves an employee agreeing to a contractual variation which entitles them to a lower salary in return for the provision of a non-cash benefit (in this case, an enhanced employer contribution to the pension scheme equal to the amount of salary sacrificed).
The employee’s salary is reduced and hence both the employee and employer pay reduced National Insurance Contributions (NICs). Employees’ take home pay is higher when compared to making a contribution direct to the scheme. Employers will often share some of their NIC savings with the employee in the form of an additional contribution to the pension scheme.
Income tax relief is generally applied to contributions made to the pension scheme, meaning that the benefit derived from the salary sacrifice arrangement is limited to the NIC savings.
Changes announced in the Budget
From April 2029 the amount of pension contributions which can be salary sacrificed will be limited to £2,000 per tax year. In practical terms any pension contributions above that level will attract both employee and employer NICs.
An employee earning up to £40,000 p.a. basic salary and sacrificing up to 5% of that basic salary for pension contributions will fall within the new limit and no additional NICs will be payable by the employee or employer. Individuals contributing more than this via salary sacrifice will, however, see an increase in their NICs, as will their employer.
The reforms come at a time when the government is focussed on improving member retirement outcomes and the newly launched Pensions Commission is looking at pensions adequacy. They create an obvious tension with these policy aims and work will be needed to ensure that they do not act as a disincentive to pension savings.
Practical considerations for employers
The first question for most employers will be whether it is worthwhile continuing to offer a pensions salary sacrifice arrangement beyond April 2029 given the introduction of the cap and the likely increased governance burden (see below) of the new regime.
The answer to this question will be nuanced and will depend on a number of factors, including the make-up of the scheme membership and how much they are contributing to the pension scheme.
Employers may also notice that ordinary (non-salary sacrificed) employer contributions will remain exempt from NICs. Could an employer therefore look to replicate the NIC benefits of an existing salary sacrifice arrangement by reducing future salary growth and instead providing employees with higher ordinary employer contributions? It will be interesting to see if HMRC introduces any anti-avoidance measures to prevent such behaviour.
For those employers wishing to retain pensions salary sacrifice beyond April 2029, consideration will need to be given to:
- The changes needed to payroll systems to track earnings and pension contributions against the £2,000 cap to ensure that the correct employee and employer NICs are paid (employers will need to report the total amounts sacrificed through existing payroll software and HMRC will publish further guidance on this in due course)
- The contractual terms in place with employees and whether these need to be amended in light of the changes
- Any changes needed to member communications (including those used for auto-enrolment purposes)
The reforms are likely to increase the administrative burden for occupational pension schemes.
Practical considerations for trustees
For trustees of occupational pension schemes open to accrual the focus will likely be on:
- Ensuring that the scheme rules properly reflect the new regime (with keyhole changes likely to be required)
- Making sure that there are no unintended benefit consequences from the changes (for example, if a pre-salary sacrifice reference salary is used for lump sum death benefit purposes, ensuring that the changes do not inadvertently affect the benefit payable)
Further guidance will be published by HMRC before April 2029.
If you have any queries on these forthcoming changes or if you wish to discuss your scheme more generally, please get in touch with Gavin Ellison on 0191 279 9854 or by email to gavin.ellison@wbd-uk.com
