Changes to salary sacrifice: what do they mean for employers?

The Chancellor of the Exchequer, Rachel Reeves MP, has delivered her highly anticipated Autumn Budget 2025 to Parliament, with the most significant reform for occupational pension schemes being changes to salary sacrifice. These changes will not take effect until April 2029, but employers should start to think about the implications now.

Salary Sacrifice: Understanding the Changes

Currently, benefits paid into a pension scheme through salary sacrifice arrangements are exempt from both employer and employee National Insurance Contributions (NICs). From 6 April 2029, this will change significantly: only the first £2,000 of employee pension contributions made through salary sacrifice each year will remain exempt from NICs.

All pension contributions through salary sacrifice will continue to be exempt from Income Tax, subject to the usual limits, and employer contributions can continue to be made NICs free. Employee contributions made via other pension arrangements which are already subject to NICs will also be unaffected.

How Salary Sacrifice Currently Works

Under a salary sacrifice arrangement, an employee agrees to reduce their contractual salary, and in return the employer agrees to pays an equivalent amount into the relevant pension scheme in addition to its standard employer contribution.

Under the current system:

• Income Tax and NICs are calculated on the reduced salary.
• Employees typically enjoy higher net take-home pay compared to making the same pension contribution directly.

• Employers pay lower employer NICs, generating cost savings. 

   

These advantages have made salary sacrifice a popular feature of workplace pension design.

The Budget’s Changes

As noted above, from April 2029, only the first £2,000 of employee pension contributions made through salary sacrifice each year will remain exempt from NICs. Both employer and employee NICs will be payable on employee pension contributions made via salary sacrifice arrangements above this threshold.

The new £2,000 threshold will limit the NICs savings available to employers and employees, but does not cap the amount of overall pension contributions that can be made. Employers and employees will still be able to make contributions above £2,000 through salary sacrifice arrangements, although annual allowance considerations will continue to apply.

It should also be noted that the contribution limit will be set at £2,000 initially, but the draft legislation includes the option to amend the threshold through regulations. This means that it could be reduced further in the future.

What the NICs Cap Means for Employers

Organisations with salary sacrifice arrangements are likely to see a reduction in employer NIC savings from April 2029, although the extent of this will depend on existing contribution levels. 

Employees contributing above £2,000 via salary sacrifice will also see a reduction in take-home pay and employers will wish to communicate with employees about this change. Employers should also be aware that they are likely to be subject to new reporting requirements about salary sacrificed contributions. HMRC has said it will engage with industry and employers on this and publish further guidance in due course.

Employers will need to consider whether they wish to continue with their existing salary sacrifice arrangements after April 2029, taking into account the reduced NICs savings, the impact on employees and the likely increased administration costs. The long lead in time means that they have plenty of time to decide how to proceed. 

Some initial issues for employers to consider include the following:

• Before making any changes to existing arrangements, employers will need to consider whether this is possible under existing contractual arrangements with employees or whether an amendment is required. If an amendment is needed, employees may need to agree to the change.
• Employers will also need to consider the impact on any pensions or non-pensions benefits linked to salary or to the level of employer or employee pension contributions.
• If any changes to existing arrangements result in a reduction in employer contributions, a 60-day consultation with employees under pensions legislation is likely to be required.
• If the scheme is a relief at source scheme, higher and additional rate taxpayers will get only basic rate tax relief up front if they no longer contribute via a salary sacrifice arrangement. As a result, they will need to reclaim the balance of their full tax relief (40% for higher rate taxpayers and 45% for additional rate taxpayers) by completing a self-assessment tax return (or writing to HMRC). Employers should ensure they communicate this to affected employees.
• Employers will need to ensure that they continue to comply with their obligations under auto-enrolment legislation, including minimum contributions of 8% of qualifying earnings (of which the employer must contribute at least 3% of qualifying earnings).

Much of the detail surrounding this reform remains to be confirmed and we recommend waiting for full details before taking any final decisions.