Salary sacrifice pension schemes have long been seen as one of the most tax-efficient ways for employees to save for retirement.
However, following the Autumn Budget 2025 announcement, some employers may now be reassessing whether these schemes still work for their business.
Research from the Standard Life Centre for the Future of Retirement found that two in five employers who currently offer salary or bonus sacrifice schemes are now less likely to continue providing them once the new cap comes in.
The research also found that one in 10 employers offering these schemes have already decided to withdraw them completely since the Budget announcement.
These figures are significant and may leave both employers and employees wondering whether salary sacrifice pensions are still worthwhile.
What is changing for salary sacrifice pensions?
From April 2029, the Government will introduce a £2,000 annual cap on the amount of employee pension contributions made through salary sacrifice that qualify for National Insurance savings.
At the moment, salary sacrifice can reduce the amount of salary subject to Income Tax and National Insurance. This makes it a highly efficient way for employees to contribute to their pension, while also helping employers reduce National Insurance costs.
Under the new rules, only the first £2,000 of employee pension contributions made through salary sacrifice each year will remain exempt from National Insurance.
Any contributions above this threshold can still be paid into the pension and will still benefit from Income Tax relief, subject to the usual pension rules and limits. However, the amount above the cap will be subject to National Insurance for both employees and employers.
Importantly, this change does not limit how much someone can pay into their pension. It simply reduces one of the key tax advantages linked to salary sacrifice.
How could this affect employers?
For employers, the biggest concern is likely to be the additional payroll cost.
From April 2029, salary sacrifice pension contributions above the £2,000 cap will attract employer National Insurance, currently charged at 15 per cent.
This could become a noticeable cost for businesses that offer generous pension contributions, matched contribution schemes, or bonus sacrifice arrangements.
It is easy to see why some employers may now be reviewing whether their current schemes remain affordable.
However, withdrawing a salary sacrifice scheme completely could also create problems.
Salary sacrifice pensions are often seen as a valuable part of an employee benefits package. Removing the scheme could make a business less competitive when trying to attract and retain staff.
Instead of removing the scheme altogether, employers may want to review:
- Current contribution levels
- Bonus sacrifice arrangements
- How National Insurance savings are shared with employees
- Payroll and pension processes
- How the change will be communicated to staff
With the rules not taking effect until April 2029, employers have time to plan properly rather than making rushed decisions.
How could this affect employees?
Employees who currently contribute more than £2,000 per year through salary sacrifice may see reduced National Insurance savings once the cap is introduced.
This could mean a small reduction in take-home pay compared with the current rules, depending on how much they contribute and their level of earnings.
Middle earners may feel the impact more noticeably if their contributions above the cap fall within the main employee National Insurance band. Lower earners may be less directly affected if their annual salary sacrifice pension contributions are below £2,000.
However, the main benefit of pension saving remains in place.
Contributions made through salary sacrifice will still receive Income Tax relief, subject to the normal pension limits. Pension contributions can also help reduce adjusted net income, which may be useful for those affected by higher-rate tax thresholds, the High Income Child Benefit Charge, or the tapering of the personal allowance.
So, while the National Insurance benefit may be reduced, salary sacrifice pensions are unlikely to lose all their value.
Is salary sacrifice still worth it?
In many cases, yes.
The changes may reduce the overall saving available, especially for employees contributing larger amounts. However, the first £2,000 of employee pension contributions through salary sacrifice will still benefit from National Insurance savings.
On top of this, salary sacrifice can still support long-term pension saving, provide Income Tax relief, and form part of a strong employee benefits package.
It is also worth remembering that the change does not come into force until April 2029. This gives employers and employees time to make the most of the current rules and review their approach before the new cap applies.
The key point is that salary sacrifice pensions should not be dismissed completely.
Instead, employers should use this time to understand the potential cost, model the impact on their workforce, and decide whether their scheme needs to be adjusted.
What should employers do now?
Although April 2029 may feel like a long way off, employers should start reviewing their arrangements now.
This does not mean making immediate changes, but it does mean understanding how the new cap could affect the business and its employees.
Employers may want to consider:
- How many employees currently contribute more than £2,000 per year through salary sacrifice
- The potential increase in employer National Insurance costs
- Whether bonus sacrifice arrangements need to be reviewed
- How any changes could affect staff benefits and retention
- What communication employees will need before the rules change
Good communication will be especially important. Employees may be concerned about whether their pension contributions are being restricted, so employers should make it clear that the cap only affects the National Insurance saving, not the amount that can be paid into a pension.
Planning ahead
The salary sacrifice pension cap may not be welcomed by many employers or employees, but it does not mean these schemes are no longer useful.
The benefit is changing, not disappearing.
Employers now have an opportunity to review their pension arrangements, understand the potential costs, and make sure their benefits package remains competitive.
Employees should also take advice if they are unsure how the change could affect their pension contributions or take-home pay.
Our professional team can help employers model the impact of the new rules, review existing salary sacrifice arrangements, and explain the changes clearly to employees.
We can also support individuals who want to understand how the cap may affect their pension planning and overall tax position.
The rules may develop further before April 2029, and we will continue to keep you updated.
To learn more about how the salary sacrifice pension cap could affect you or your business, get in touch.