The government is under pressure to adapt its planned salary sacrifice cap after a number of amendments were backed in the House of Lords and a controversial loophole was confirmed. Plans initially announced in the 2025 Autumn Budget had been set to introduce a £2,000 per year cap, starting in April 2029, on the amount that can be contributed to a pension via salary sacrifice without incurring National Insurance (NI). Any pension contributions sacrificed above the £2,000 limit would become subject to both employee and employer National Insurance. The move was expected to raise an estimated £4.7 billion for the Treasury by 2029/30.
Last week, the proposals hit a speed bump with the upper chamber voting to raise the proposed £2,000 limit to £5,000, while the government clarified that the cap would apply per job, not per person. Peers also voted in favour of any pension contributions over the new £2,000 limit being excluded from student loan repayment calculations and exempting basic-rate taxpayers altogether. However, the amendments will not be added to the final legislation unless they are voted through by MPs in the House of Commons.
A Treasury spokesperson said: "Salary sacrifice costs were set to treble to £8bn as high earners piled in huge bonuses without paying a penny in tax - a taxpayer‑funded perk largely benefitting the better off."
What changes have been proposed?
The headline amendment passed by the House of Lords was a £5,000 cap, more than double the government's proposed £2,000 limit.
Other alterations approved by peers include restricting the policy to higher-rate taxpayers, exempting charities and small and medium-sized enterprises, and ensuring graduates will not have to make increased student loan repayments.
There has also been criticism that the limit applies to each job a worker has in a tax year, meaning someone with multiple jobs could accumulate a higher cap. However, no amendment was passed to restrict this element of the legislation.
Why does the House of Lords want to change the salary sacrifice reforms?
The £2,000 salary sacrifice cap has drawn sharp criticism. Following its announcement in the Autumn Budget, some pension experts and business leaders warned the move could disincentivise workers from making pension contributions, especially in the private sector. While in the short term, it is expected to bring in £4.7 billion in revenue, the long-term negative consequences could see employees reduce their own contributions because they no longer receive the full NI saving, while employers scale back workplace pension schemes to avoid extra NI costs.
It has also been suggested that the cap could widen the gap between private and public sector pensions, with a 2019 ONS report indicating that approximately 30% of private sector employees utilise salary sacrifice arrangements, compared to just 9% of public sector workers. However, HMRC said in December 2025 that 56% of workers using salary sacrifice would not be affected by the changes because they currently save less than the proposed £2,000 annual limit.
Compounding these criticisms was the news that the £2,000 cap would apply to each employer a worker has in a tax year rather than per worker. This means high-earners whose income is split across multiple employers, or who have multiple jobs within a single tax year, could benefit from a much higher cap than single-employer workers.
These issues, along with the usual party-political motivations, have pushed the Lords to pass multiple amendments. The Commons now has the option to push the legislation through with these changes, vote them down, or have the government go back to the drawing board to appease some of the dissenters.
What is salary sacrifice?
Salary sacrifice allows an employee to agree to reduce their gross (pre-tax) salary. In return, their employer pays the equivalent amount directly into the employee's pension pot.
The main benefit of this method is tax efficiency. With a standard pension contribution, you are paid your full salary after both income tax and National Insurance (NI) are deducted. You then make a pension contribution from your net (take-home) pay. You then get income tax relief on your contribution, but you don't get the NI back.
Through salary sacrifice, your pension contribution is taken from your salary and paid into your pension before any tax or NI is calculated. Because this reduces your official gross salary, both the employee and the employer save on National Insurance Contributions (NICs).
Why else do people use salary sacrifice?
Beyond the general NI saving, salary sacrifice can be used to lower your 'adjusted net income' (ANI), the income figure HMRC uses to determine eligibility for certain tax allowances and state benefits.
Salary sacrifice is particularly beneficial for people with an ANI over £100,000, as they face two significant penalties:
- Loss of Personal Allowance - You begin to lose your £12,570 tax-free personal allowance (reduced by £1 for every £2 you earn above £100,000), creating an effective 60% tax rate on income between £100,000 and £125,140.
- Loss of Free Childcare - In order to qualify for 30 hours of free, government-funded childcare via the Tax-Free Childcare scheme, both parents (or the sole parent) must earn less than £100,000 per year.
By using salary sacrifice, someone earning £110,000 could put £11,000 into their pension. This would mean that their ANI drops to £99,000, allowing them to keep their full personal allowance and their free childcare entitlement.
In addition, the High Income Child Benefit Charge (HICBC) applies to those earning over £80,000. This is a tax charge that 'claws back' Child Benefit when one partner in a household has an adjusted net income over £60,000. The benefit is tapered and is fully withdrawn once your ANI reaches £80,000. By using salary sacrifice, an employee earning £65,000 could contribute £6,000 to their pension. This reduces their ANI to £59,000, taking them below the threshold and allowing them to keep 100% of their Child Benefit, tax-free.
How will people be affected by the change?
A cap would impact people differently, depending on how much an employee earns and their level of contribution. We have summed up the effects in this table:
| Who is affected | Impact |
| Lower Earners | Lower earners who contribute less than £2,000 into their pension via salary sacrifice will be unaffected |
| Average Earners | Many average earners may not be affected. For example, an employee earning £40,000 who sacrifices 5% of their salary (£2,000) will be unaffected by the cap. An employee earning £45,000 and sacrificing 5% (£2,250) will end up paying NI on the £250 above the cap, equating to an additional £30 per year. |
| Higher Earners | The change will be felt most by those using salary sacrifice for significant contributions. For instance, a higher earner on £125,000 sacrificing £25,000 (to bring their income below the £100,000 threshold) will face a new NI bill of around £460 per year |
| Employers | Businesses will face a new cost due to their new employer NI liabilities. Experts have warned that this additional cost could be passed on to employees in the form of smaller pay rises or less generous pension scheme contributions in the future |
What should you do with your pension?
Decisions that could impact your long-term retirement plans should not be made based on unconfirmed proposals, particularly when the consequences of making a mistake can be costly. Legislation goes through multiple periods of review and recalibration before it ultimately becomes law, so we are still some way from knowing exactly how the proposed salary sacrifice cap will work, or if it will be watered down, delayed or scrapped. If you are unsure how to best plan for your retirement, you could seek out some expert help.
If you don't already know a financial adviser, you can take advantage of a Free pension review* with an FCA-regulated adviser. They will look at your total retirement picture and review your options and goals, for FREE and without obligation. Alternatively, the government's free, impartial Pension Wise service offers guidance for those aged 50 and over with defined contribution pensions.
If a link has an * beside it this means that it is an affiliated link. If you go via the link, Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. The following link can be used if you do not wish to help Money to the Masses or take advantage of any exclusive offers - Unbiased
MTTM AI (beta) 
