How will you be affected by the proposed change to salary sacrifice tax rules?

A change to the tax relief for pension contribution was proposed in last year's budget, if the Bill is passed, what difference will it make to you?

At the Autumn Budget 2025 it was announced that the relief for pension contributions via salary sacrifice was going to be limited from April 2029. The relevant bill has passed the House of Commons and is with the House of Lords at the time of writing.

It is proposed that if you contribute to your pension via salary sacrifice, whereby your gross pay is reduced in return for a contribution to your pension, you (and your employer) will be charged national insurance on the amount sacrificed above a limit.

The suggested limit is currently £2,000.

At current tax rates this would mean:

For a £10,000 salary sacrifice made by a higher rate taxpayer

Overall new cost: £160 for the taxpayer and £1,200 for their employer.

Notes:

• Assumes an NIC rate of 15% for employers
• Higher rate tax payers will mostly pay 2% on the excess because it will be above the upper earnings limit.

For a £10,000 salary sacrifice made by a basic rate taxpayer

Overall new cost: £640 for the taxpayer and £1,200 for their employer.

The impact of the new rules will mainly be felt among employers.

Notes:

• Assumes an NIC rate of 15% for employers
• Basic rate taxpayers pay 8% on earnings between the NIC primary threshold and upper earnings limit, and 2% on earnings above the upper earnings limit.

Key takeaways:

 Assuming the Bill is passed by the House of Lords

• Salary sacrifice for pensions still works and still gives income tax relief, benefits are better for higher rate taxpayers.
• From April 2029, only the first £2,000 of salary-sacrificed pension contributions per year will be exempt from NICs.
• Any contributions above £2,000 will be subject to employee and employer NICs (at the usual Class 1 rates), reducing the overall benefit of salary sacrifice.
• The changes mainly affect the NI saving element, income tax relief remains unchanged.

There is still time to make contributions under the current rules before the new scheme comes into effect.

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