HM Revenue and Customs (HMRC) has announced a significant change to the treatment of salary sacrifice pension arrangements. From April 2029, only the first £2,000 of annual pension contributions made through salary sacrifice will be exempt from National Insurance contributions (NICs).
The measure is intended to focus National Insurance relief on lower and middle-income workers, while generating additional revenue to support public finances.
According to government figures, around 7.7 million people use salary sacrifice to contribute to pensions, with the majority making contributions below £2,000 and so remaining unaffected by the new cap.
Overview of the New Policy
Under the new rules, salary sacrifice pension contributions above £2,000 annually will be subject to both employee and employer National Insurance contributions.
Currently, all salary sacrifice pension contributions are exempt from NICs, providing a tax advantage for those using this arrangement. Pension contributions made through salary sacrifice will continue to benefit from income tax relief within existing limits.
HMRC has presented the reform as a move to ensure fairness in the tax system and to concentrate support on those with smaller workplace pension contributions.
Implementation Timeline and Scope
The rule change will take effect from April 2029, providing a lead-in period for employers and employees to prepare. It applies universally to all employers who operate salary sacrifice pension schemes, covering both public and private sectors.
Government statements affirm that most public sector employers already have limited access to salary sacrifice for pension contributions, primarily due to existing Managing Public Money rules. Further guidance and implementation detail will be released closer to the start date.
Impact on Employees
According to government estimates, approximately 4.3 million individuals who contribute £2,000 or less each year through salary sacrifice will continue to receive a full National Insurance exemption on those contributions. This group represents around 56 per cent of all employees using the scheme.
Meanwhile, about 3.3 million workers constituting roughly 44 per cent currently contribute more than £2,000 a year and will be impacted by the change. For these employees, any contributions above the capped amount will be treated as standard workplace pension contributions for NIC purposes.
Government modelling suggests the average additional National Insurance contribution for affected employees will be £84 in the 2029/30 tax year.
Implications for Employers
Employers will also face increased National Insurance liabilities on salary sacrifice pension contributions above the £2,000 threshold. The Office for Budget Responsibility (OBR) has forecast additional revenue from this policy, as both employee and employer payments will be affected.
In Parliament, discussion focused on the likely division of this increased cost. Responding to a question from Baroness Stedman-Scott,
Treasury minister Lord Livermore stated that the government’s cost modelling assumes employers will pass through around 76 per cent of the additional NICs cost to employees. This assumption is in line with previous changes to employer National Insurance.
Political Response and Policy Rationale
The government has presented the new cap as balancing the need to maintain pension incentives with the broader goal of managing the rising cost to the exchequer of tax reliefs.
Treasury figures estimate that income tax and National Insurance reliefs on pension contributions are worth more than £70 billion a year. Speaking in the House of Lords, Lord Livermore explained the motivation behind the policy:
'This is the fairest way to support pensions saving whilst ensuring relief is targeted at those who need it most.' Ministers say the lengthy notice period is intended to give employers and employees time to adapt to the new arrangements.
Final Summary
The forthcoming £2,000 cap on National Insurance relief for salary sacrifice pension contributions will represent a notable adjustment in the UK’s tax treatment of pensions.
While the majority of scheme participants are expected to remain fully exempt, higher contributors and employers will see increased NICs on pension contributions above the threshold. By introducing a lengthy lead-in period, the government aims to ease the transition for businesses and employees alike.
Updates and guidance will be made available as implementation approaches. For those monitoring their pension arrangements and the impact of tax changes, tools such as the Pie app can help users stay well-informed.
