Salary sacrifice pension cap announced in the Autumn Budget 2025

The 2025 Budget has confirmed a significant change to salary sacrifice pension contributions: from April 2029, a cap of £2,000 per employee, per year, will be introduced for salary sacrifice pension contributions. While this may sound like a major shift, the practical impact for most employers and employees is less dramatic than it first appears. There is ample time to prepare, and salary sacrifice remains a valuable benefit.

What is salary sacrifice for pensions?

Salary sacrifice is an arrangement where an employee agrees to give up part of their gross salary in exchange for their employer making an equivalent pension contribution on their behalf. This means the employee’s taxable income is reduced, resulting in potential savings on income tax and National Insurance Contributions (NICs). For employers, it can also reduce their NIC liability, making it a mutually beneficial way to enhance retirement savings while maximising take-home pay.

What has been announced?

From April 2029, employees will be able to make pension contributions via salary sacrifice up to a maximum of £2,000 per year. The first £2,000 of salary-sacrificed contributions will continue to attract full NIC savings for both employers and employees, as is currently the case. Any contributions above this threshold will be subject to NICs.

Importantly, employee pension contributions that are not made through salary sacrifice will not be affected by these changes. 

What does this mean for employers right now?

• The changes do not take effect until April 2029, so employers can continue to use the current salary sacrifice arrangements without any immediate need for change.
• There are no new compliance requirements or administrative changes required at this stage.
• Employers and employees can continue to benefit from full NIC savings on all salary sacrifice contributions until the cap is introduced. 

Should employers still use salary sacrifice for workplace pensions?

Absolutely. Between now and April 2029, the full NIC savings are available on all salary sacrifice contributions. Even after the cap is introduced, salary sacrifice will continue to provide value, especially for employees whose contributions remain below the £2,000 threshold.

Setting up salary sacrifice can seem complex, but many payroll and pension providers offer support, including payroll integration, templates, and educational resources for employees. This can help employers implement and manage salary sacrifice schemes efficiently.  

How much could employers save before 2029?

Here are some examples based on a typical 5% employee contribution rate:

• £40,000 salary: £460 total annual saving (£300 employer, £160 employee)
• £75,000 salary: £638 total annual saving (£563 employer, £75 employee)
• £125,000 salary: £1,063 total annual saving (£938 employer, £125 employee)

For a company with 50 employees with an average salary of £40,000, this equates to £23,000 per year in savings - nearly £70,000 up to April 2029.

Some employers choose to reinvest their NIC savings into enhanced pension contributions, further improving retirement outcomes for employees at no additional cost.

What will the impact be when the £2,000 cap is introduced?

For most employees, the impact will be minimal. Using a 5% employee contribution as an example:

• Up to £40,000 salary: No change. Contributions remain within the £2,000 threshold.
• £75,000 salary: Around £35 less in NIC savings for employees, £263 less for employers.
• £125,000 salary: Around £85 less in NIC savings for employees, £638 less for employers.

The key takeaway is that all employees using salary sacrifice will still benefit from NIC savings on the first £2,000 of contributions. The majority of employees, especially those on average earnings, will not be affected by the cap. 

What we do not yet know

While the headline policy is clear, several practical details remain uncertain.

• Payroll implementation: It is not yet clear how payroll systems will need to be updated to monitor and enforce the £2,000 cap on salary sacrifice contributions. Guidance from HMRC and payroll software providers is awaited.
• Pension provider processes: Pension providers may need to adjust their systems to accommodate the new cap and ensure correct reporting and compliance. The specifics of how this will be managed and what support will be available to employers are not yet confirmed.
• Transitional arrangements: There may be transitional rules or grace periods as the cap is introduced, but these have not yet been detailed.
• Interaction with other benefits: It is also unclear how the cap will interact with other salary sacrifice arrangements (e.g., for childcare or cycle-to-work schemes) and whether there will be any cumulative limits or reporting requirements.

Employers should monitor updates from HMRC, payroll providers, and pension scheme administrators as further guidance is released.

Summary

• The £2,000 cap on salary sacrifice pension contributions will take effect from April 2029. Until then, employers and employees can continue to benefit from the current system.
• The majority of employees will not be affected by the cap.
• Key implementation details are still to be clarified by HMRC and providers.

If you need further advice or want to discuss how these changes might affect your organisation, please get in touch.