Chancellor Rachel Reeves has confirmed changes to salary sacrifice pension schemes in the Autumn Budget today. The move, introduced to help fill the gap in public finances, is expected to raise an estimated £4.7 billion for the Treasury by 2029/30. The announcement follows HMRC-commissioned research conducted earlier this year, which surveyed employers about their attitudes towards hypothetical changes to the schemes. The changes will have a significant impact not only on retirement savings but also on the financial planning many families use to access benefits, such as free childcare.
What has changed?
The government has not abolished salary sacrifice entirely, as this would likely hit average earners the hardest. Instead, the Chancellor has confirmed she will introduce a cap on the amount that can be contributed to a pension via salary sacrifice without incurring National Insurance. This cap has been set at £2,000 per year. It means that from April 2029, any pension contributions sacrificed above the £2,000 limit will become subject to both employee and employer National Insurance.
What is salary sacrifice?
Salary sacrifice, also known as 'Salary Exchange', is a formal arrangement offered by many employers. It 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, summarised below:
- 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 get income tax relief on your contribution, but you don't get the NI back.
- Salary Sacrifice Contribution - 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 you (the employee) and your employer save on National Insurance Contributions (NICs).
This NI saving means you can boost your pension pot for the same cost, or sometimes even increase your take-home pay.
Why do people use salary sacrifice?
Beyond the general NI saving, salary sacrifice is a powerful financial planning tool because it lowers your 'adjusted net income' (ANI). This is the income figure HMRC uses to determine your eligibility for certain tax allowances and state benefits.
Those earning over £100,000
Salary sacrifice is particularly beneficial for people with an adjusted net income 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.
Those earning over £80,000
The High Income Child Benefit Charge (HICBC) 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.
Who is affected by the change?
A cap would impact people differently, depending on how much an employee earns and their level of contribution.
| 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 |
Investment Platform AJ Bell published findings in the Times when the rumours initially surfaced. It found that if salary sacrifice was capped at £2,000, the pension pot of a 35-year-old worker earning £100,000 today would be worth £49,682 less by the time they reached 65. The figures assumed that the worker had £30,000 already saved into a pension and benefited from 5 per cent investment growth and a 3 per cent annual pay rise.
It is also worth noting that the impact of the cap depends on what employers currently do with the 13.8% National Insurance saving. For companies that keep these savings as a business cost reduction, the cap will mean a new tax bill; they will now have to pay that NI to HMRC on any employee contributions over the £2,000 limit. However, some employers pass this saving onto the employee and add it to the pension contribution as a 'bonus'. This means that the cap may not impact the employer financially at all if they divert the 'bonus' to pay the new NI tax bill, and it is the employee who will lose out directly. It means a potential double blow as the additional 13.8% employer 'bonus' contribution will simply disappear for any amount that is sacrificed above the £2,000 cap.
Industry reaction
The £2,000 salary sacrifice cap has drawn sharp criticism from pension experts and business leaders, who warn the move could undermine the UK’s savings culture and penalise private sector workers. Critics have been quick to point out that the change effectively reduces the take-home pay of those who use salary sacrifice to build their pension.
Leading industry bodies have expressed deep concern that this short-term revenue raiser will have long-term negative consequences. Yvonne Braun, Director of Policy at the Association of British Insurers (ABI), issued the following warning: "The industry has long warned that we are 'sleep-walking' into a retirement crisis. With this cap on salary sacrifice, we are no longer sleep-walking, we are speed-walking."
The ABI’s research suggests that removing these incentives creates a "double whammy": employees may reduce their own contributions because they no longer receive the full NI saving, and employers may also scale back the generosity of their pension schemes.
Additionally, industry experts have warned that the cap on salary sacrifice could widen the gap between private and public sector employees. Reports from the Office for National Statistics in 2019 indicate that approximately 30% of private sector employees utilise salary sacrifice arrangements, compared to just 9% of public sector workers. It means that the cap will likely disproportionately impact private sector workers' pensions.
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