UPCOMING Webinars & Events3 Jun 2026
Webinar: What the unfair dismissal changes mean for your business
Unfair Dismissal Reform: What's changing, when and why 24th June 2026 matters
Articles
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
| UNDER THE OLD RULES: | UNDER THE NEW RULES: |
| Taxable pay is reduced by £10,000. | Taxable pay is reduced by £10,000. |
| Income tax is saved at 40% – £4,000. | Income tax continues to be saved at 40% – £4,000. |
| Employee’s national insurance is only calculated on the reduced taxable pay | Employee’s national insurance is now calculated on an additional £8,000 for a cost of £160 |
| Employer’s national insurance is only calculated on the reduced taxable pay | Employer’s national insurance is now calculated on an additional £8,000 for a cost of £1,200 |
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
| UNDER THE OLD RULES: | UNDER THE NEW RULES: |
| Taxable pay is reduced by £10,000. | Taxable pay is reduced by £10,000. |
| Income tax is saved at 20% – £2,000. | Income tax continues to be saved at 20% – £2,000. |
| Employee’s national insurance is only calculated on the reduced taxable pay | Employee’s national insurance is now calculated on an additional £8,000 for a cost of £640 |
| Employer’s national insurance is only calculated on the reduced taxable pay | Employer’s national insurance is now calculated on an additional £8,000 for a cost of £1,200 |
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.
Key information +-
THE AUTHOR
Sarah Messruther
Senior Manager, Mixed Tax
More & Other Musings
View all related contentNEW Articles11 May 2026
Soaring tax receipts for CGT and NICs
The amount of tax collected by HMRC for 2025/26 increased by 9.3% compared to the previous year. The figure is unsurprising given the hike in capital gains tax (CGT) rates, as well as employer national insurance contributions (NICs).
NEW Articles11 May 2026
The ‘mansion tax’ and property prices – what’s to come?
Further details have emerged about the potential impact of the ‘mansion tax’ announced in the last Budget.
NEW Articles11 May 2026
Penalties for late VAT payments
More than 580,000 traders were penalised for late payment of VAT last year, representing a quarter of businesses registered for VAT. A sure sign that the tougher penalty regime introduced in 2023 is hitting cash-strapped businesses.
NEW Articles11 May 2026
Close company directors asked to reveal more
Directors of close companies will have to provide more details than previously when completing their self-assessment tax returns for 2025/26. In the longer term, close companies themselves will also be required to provide significantly more detailed information.