Salary sacrifice changes in the budget 2025

The salary sacrifice changes in the 2025 budget are significant. One of the most notable effects is on pension contributions, coming into effect in 2029. This article looks at what's changing and what it means for employers and employees.

What is salary sacrifice, and how does it work?

Salary sacrifice lets you give up part of your salary, with your employer paying that amount into your workplace pension instead.

As a result, it's a tax-efficient way to save for retirement. You don't pay national insurance on the sacrificed amount, and you don't pay tax on it either.

It can also reduce your overall earnings, which means some people end up qualifying for benefits they wouldn't otherwise get.

What are the salary sacrifice changes?

From April 2029, national insurance relief on salary sacrifice pension contributions will be capped at £2,000 per year. The UK government has published further details about the proposed reforms to salary sacrifice pension contributions, including how the new rules will apply from April 2029.

Many middle and higher earners will see a slight drop in take-home pay as a result. You can still contribute above £2,000.

You'll just owe national insurance on anything over that amount.

Salary sacrifice changes in more detail

The £2,000 cap is the key number. You'll pay national insurance at the usual rate on anything above it.

How much this affects you depends on your salary and your contributions. If you earn £40,000 or less and contribute 5% via salary sacrifice, you're probably fine.

Tony earns £37,000 a year. He pays 5% through salary sacrifice. His pension contribution is £1,850.

That's under the cap, so no national insurance applies.

However, it's a different story for higher earners or anyone making larger contributions. Both groups are likely to see a reduction in take-home pay.

Salary sacrifice changes and the effects for employers

Meanwhile, employers aren't off the hook here either.

What employers need to communicate

Employers should talk to affected staff clearly and early. People need to understand their options and why things are changing.

In addition, employers will face new reporting requirements for salary sacrifice payments. They should start reviewing systems and processes now, ahead of formal HMRC guidance.

HMRC will consult with the industry on the specifics. Employers also need to decide whether to keep their salary sacrifice scheme running as is.

What employers need to consider

• The changes land in April 2029
• NIC savings will fall
• Employees will be affected
• Admin costs will go up
  
  

Steps to work through:

• Whether changes are even possible, depending on existing contracts
• The knock-on effect on pensions or any salary linked benefits
• Whether a 60-day employee consultation is required under pensions law (applicable if employer contributions are being reduced)
• Auto-enrolment obligations. Minimum contributions still apply (currently 8% of qualifying earnings, at least 3% from the employer)
  
  

Salary sacrifice changes: What happens to tax relief?

The salary sacrifice changes are about national insurance, not tax relief. Tax relief on pension contributions stays as it is. Basic rate taxpayers still get the 20% top up, and higher and additional rate taxpayers still get more.

The relief cap remains. 100% of your earnings or £60,000, whichever is lower.

After April 2029, you can still maximise salary sacrifice contributions and get full tax relief. The only thing that's capped is the NI relief, at £2,000.

Are salary sacrifice changes worth worrying about?

Probably not for most people. Salary sacrifice still has real advantages. It can keep you below a higher tax threshold and help you hold onto benefits you'd otherwise lose.

Pensions remain one of the most tax-efficient ways to save for retirement, and salary sacrifice is a widely used tool. If you're unsure how the salary sacrifice changes affect you, a pension financial advisor can help you work it out.

Regulated Advice can match you with a local, FCA regulated advisor. We take the hassle out of finding someone suitable, and the FCA protects you for any advice they give.

Find a financial advisor near you.