From April 2029, the amount of salary that can be exchanged for pension contributions and still attract NI relief will be limited to the first £2,000 per annum.
Any salary sacrifice pension contributions made above the £2,000 cap will no longer qualify for relief from employee or employer NI contributions. However, income tax relief on pension savings remains unchanged under the new rules.
Scope of the upcoming changes
Data from HM Revenue & Customs (HMRC) shows that around 7.7 million workers currently use salary sacrifice schemes for pension contributions.
Of these, nearly 3.3 million contribute more than £2,000 each year and are therefore expected to lose some existing NI advantages when the cap takes effect.
The policy will apply to all workplace pensions using salary sacrifice, affecting both private and public sector employees who exceed the annual limit.
Impact on employees
The most substantial effect will be felt by higher earners and those making additional voluntary pension contributions.
For example, an employee contributing £5,000 per year via salary sacrifice will only receive NI relief on the first £2,000, losing savings on the remaining £3,000. Over time, this reduction could amount to several thousand pounds in missed NI benefits.
Consequences for employers
Employers will also see an increase in National Insurance costs for salary sacrifice contributions exceeding the new cap. These changes could result in higher annual NI liabilities for businesses with a significant number of staff making large pension contributions.
Industry reaction and analysis
Industry professionals have cautioned both employers and employees to begin planning now in order to manage the transition effectively. Chris Eastwood, chief executive of the pension provider Penfold, stated,
'Salary sacrifice has been a win-win for employers and employees for years. Anyone contributing more than £2,000 a year will lose NI savings on the excess, and employers will see NI costs rise accordingly.'
Advice and next steps
Experts recommend that businesses and employees use the three-year window ahead of the new rules to review contribution levels, structure payroll, and optimise any remaining National Insurance advantages.
or organisations not currently offering salary sacrifice, there is still potential to establish such schemes and benefit from NI savings before the changes come into force.
Final Summary
The introduction of a £2,000 cap on National Insurance relief for salary sacrifice pension contributions will usher in significant changes for employees and employers in the United Kingdom.
While the reform aims to rebalance pension tax advantages, it is expected to increase annual tax costs for millions with higher contribution levels and pose administrative challenges for businesses. The window before April 2029 allows companies and staff to maximise current NI arrangements and adapt future pension strategies accordingly.
Those concerned about how the new rules may affect their workplace savings can turn to specialist apps and guidance, including Pie, for comprehensive retirement planning support.
