London, November 27, 2025
The UK government will impose a £2,000 annual cap on the National Insurance Contributions (NICs) exemption for salary sacrifice pension contributions starting April 2029, affecting employees and employers nationwide by reducing the tax advantages of large pension contributions made through salary sacrifice arrangements.
Details of the NICs Exemption Cap on Salary Sacrifice
Salary sacrifice pension contributions allow employees to reduce their gross salary or bonuses, with employers redirecting that amount into pensions. Until now, this entire sacrificed amount has been exempt from NICs, offering a significant payroll tax saving for both employees and employers.
From April 2029, this exemption will be limited to £2,000 per year. Any salary sacrificed over this limit will become subject to NICs for both parties, diminishing the previous tax efficiency of pension contributions exceeding this amount.
Impact on Employees and Employers
For employees making annual contributions above £2,000 via salary sacrifice, the change means higher National Insurance bills. Employers will also face increased NIC liabilities, potentially affecting overall compensation costs and pension contribution strategies.
This policy alteration reduces incentives for using salary sacrifice as a tool for large pension contributions, which may prompt a reassessment of pension planning and remuneration packages in various sectors.
Budget Context and Government Position
This measure was introduced as part of the Labour government’s Autumn Budget 2025, announced by Chancellor Rachel Reeves. The government has emphasized that no changes will be made to the Lifetime Allowance or Lump Sum Allowance for pensions at this time, focusing the reform specifically on the NICs exemption.
The budget also confirmed increases in the basic and new State Pensions by £440 and £575 respectively, while other pension tax allowances remain unchanged.
Implications for Specific Worker Groups
Certain workforce segments, such as members of the Armed Forces Pension Scheme (AFPS) who are engaged in second careers and continue contributing to private employer pension schemes, might experience impacts from this reform. However, pension types including the AFPS15 Added Pension are expected to remain unaffected.
Looking Ahead
The introduction of the £2,000 NICs exemption cap on salary sacrifice pension contributions marks a significant shift in the UK’s pension tax landscape. It is expected to influence employer-employee negotiations around remuneration and benefits and may affect decisions on retirement savings strategies moving forward. Businesses and professionals should prepare to adjust payroll and pension policies accordingly ahead of the 2029 implementation date.