For many years, salary sacrifice has been one of the most tax-efficient ways to build a pension. However, following the latest Budget, a significant shift is on the horizon. From 6 April 2029, the National Insurance (NI) advantages of these arrangements will be capped.
While 2029 feels a long way off, the scale of these changes means businesses and employees should begin reviewing their long-term remuneration strategies now.
How Does Salary Sacrifice Work Today?
Under a salary sacrifice arrangement, an employee “sacrifices” part of their cash salary in exchange for a non-cash benefit-in this case, an increased employer pension contribution.
Because the salary is technically lower, both parties save on National Insurance:
- Employees save up to 8% (or 2% for higher earners) in Class 1 NI.
- Employers currently save 15% in employer NI (the rate rising from April 2025).
Currently, there is no limit to these NI savings other than the overall pension annual allowance.
The 2029 Change: The £2,000 Cap
Starting in April 2029, only the first £2,000 of pension contributions made via salary sacrifice per year will remain exempt from NI.
Anything sacrificed above that £2,000 threshold will be subject to Class 1 NI for both the employer and the employee, just like regular salary.
The Financial Impact (Example)
Consider an employee sacrificing £5,000 per year into their pension:
Strategic Steps: What You Can Do Now
- Maximize Current Rules: The new restriction doesn’t apply for another three years. High earners or those looking to “catch up” on pension savings should consider maximizing salary sacrifice contributions now to lock in the full 15% employer NI savings while they still exist.
- Review Contracts: Ensure that any salary sacrifice agreements are drafted to run up to 5 April 2029, allowing you to reset or cap the arrangements once the new rules take effect.
- Alternative Reward Strategies: From 2029, employers who wish to save on the 15% NI rate might consider “unilateral” employer contributions (where the employer pays more into the pension directly) instead of traditional salary sacrifice for amounts above £2,000.
- Communicate with Staff: Employees who use salary sacrifice to stay below tax “cliff-edges” (like the £50,000 Child Benefit threshold or the £100,000 Personal Allowance taper) need to be aware that while the income tax benefit remains, their NI costs will rise from 2029.
Disclaimer
This newsletter is intended for general information purposes only and does not constitute professional tax, legal, or financial advice. Tax laws, including National Insurance rates and thresholds, are subject to change. You should obtain specific professional advice regarding your individual or business circumstances before taking any action.
