The Autumn Budget 2025 introduced a significant change to the way pension contributions are treated for National Insurance purposes. Salary exchange arrangements have been a popular and efficient way to save for retirement. The government has now decided to limit the National Insurance relief that applies to these schemes.
At present, when an employee agrees to give up part of their salary and the employer pays this amount into a pension instead, no National Insurance is due on the amount given up. From April 2029, this will change. National Insurance will apply to salary exchange pension contributions above £2,000 a year. This applies to both employer and employee Class 1 National Insurance.
Approximately 3.3 million individuals could be affected by this; yet, it is unclear who exactly falls into this category. To understand your position, it is helpful to look at the strict definition of these arrangements.
Identifying a Salary Sacrifice Arrangement
Tax law does not actually define the term ‘salary sacrifice’, but HMRC guidance is clear on how it works in practice. In simple terms, an employee agrees to give up a contractual right to part of their cash pay. In return, the employer provides a non-cash benefit. In this case, that benefit is a pension contribution.
For the new £2,000 National Insurance cap to apply, two points usually need to be present. The employee must have a contract that gives them the right to a set level of pay. That contract must then be formally changed so part of that pay is given up in exchange for pension contributions.
It is important to separate salary that is given up from other types of pension funding. The £2,000 limit only applies to amounts that would otherwise have been paid as salary. It does not apply to genuine employer contributions paid from the employer’s own funds. It also does not apply to pension contributions made by employees from net pay, after tax and National Insurance have already been deducted.
There is no change to the income tax treatment. Employees can still give up more than £2,000 of salary to reduce their taxable income. This remains useful for keeping the Personal Allowance or staying eligible for Tax-Free Childcare. The only difference is that National Insurance will apply to amounts above the £2,000 limit.
The position for Owner-Managed Businesses
Many of our clients are owner-managers who pay themselves a small salary, take the remainder of their income as dividends, and have their company make pension contributions on their behalf.
Based on current guidance, the new cap is unlikely to apply to where the director does not have an employment contract granting a right to a higher salary that is subsequently “given up.” Because there is no sacrifice of existing contractual earnings, the company pension contribution is simply an employer contribution. Consequently, the £2,000 cap should not apply.
Looking ahead
The relevant legislation, the National Insurance Contributions (Employer Pensions Contributions) Bill, was published in December 2025 meaning that the cap will apply from April 2029.
The government intends to consult further on how the cap will operate in practice. We expect more details to emerge regarding anti-avoidance measures and specific implementation rules. We will continue to monitor these developments to ensure you are prepared well before the 2029 deadline.
For more information on how this might affect your business or personal tax planning, please get in touch.
