What’s changing from April 2029?
The Chancellor’s 2025 Budget introduces a significant reform to salary sacrifice arrangements for pensions. From 6 April 2029, the National Insurance (NI) exemption on salary-sacrificed pension contributions will be capped at £2,000 per employee per tax year. Currently, all pension contributions made via salary sacrifice are exempt from both employer and employee NI. This has made salary sacrifice an attractive way to boost retirement savings while reducing tax and NI costs.Under the new rules:
- First £2,000 of salary-sacrificed pension contributions per year remains NI-free.
- Any amount above £2,000 will attract standard NI charges for both employer and employee.
- Income tax relief on pension contributions remains unchanged.
Impact on employees
- Employees earning less than £50,270 (basic rate taxpayers) will pay 8% NI on any salary-sacrificed pension contributions above £2,000.
- Employees earning more than £50,270 (higher rate taxpayers) will pay 2% NI on contributions above £2,000.
As there’s no change to the tax relief, only the national insurance position, basic rate tax payers (who pay 8% NI on their earnings) are being hit harder than higher rate tax payers (who pay 2% NI on their earnings).
Impact on employers
Employers currently save 15% employer NI on salary-sacrificed pension contributions. In many cases, this saving is passed on to employees as additional pension contributions, making salary sacrifice even more attractive. From April 2029, employers will no longer enjoy this saving on contributions above £2,000. This means either:
- Employers who used the saving to top up the employee pension will no longer do so as there will be no NI saving to pass on, or
- Employers who enjoyed the saving of NI on salary sacrifice arrangements will face an additional 15% NI on the amounts above the cap.
Impact on directors and charity CEOs
Often, directors and CEOs do not use a formal salary sacrifice arrangement. Instead, they are paid a salary and separately paid an employer pension contribution.
The exact way the new cap will apply in these cases is not yet confirmed. However, HMRC stated after the Budget: “All employer pension contributions will continue to be free of NICs.” This suggests:
- If a director is offered £70,000 salary with an option to salary sacrifice £10,000, then £8,000 (the amount above the £2,000 cap) will attract employer NI at 15% and employee NI at 2%.
- If instead they are offered £60,000 salary and £10,000 employer pension contribution, it appears the whole £10,000 will remain free of NI.
This distinction could make structuring remuneration more important than ever for directors and charity controllers.
Planning ahead
- Employers: Review total reward packages and consider alternative benefit structures. Communicate changes early to avoid surprises.
- Employees and directors: If you plan to maximise salary sacrifice benefits, you have until April 2029 under current rules. Beyond that, contributions above £2,000 will incur employee’s NI at 8% or 2%, depending on your income level and employer’s NI at 15%.