Budget 2025: what it means for you

Salary sacrifice pension contributions above £2,000 will face National Insurance from April 2029.

Salary sacrifice is a vital and valuable feature of many workplace pension schemes. If your employer offers a salary sacrifice pension scheme, you can agree to give up a portion of your salary. Instead of paying that money to you as income, your employer pays it straight into your pension as an employer contribution.

Because the money goes directly into your pension before tax and National Insurance are deducted, you’ll only pay these on your reduced salary, not the full amount. This means you could end up with a higher take-home pay than if you made standard pension contributions from your salary, and a larger total pension contribution, depending on whether your employer passes on their own NIC savings.

Malli Kini, a partner at Blick Rothenberg, said, “Scrapping salary sacrifice for pensions dismantles one of the UK’s most effective and widely used saving mechanisms. Over 7 million employees rely on it to boost pension contributions and reduce National Insurance, while employers depend on it to manage payroll costs efficiently.”

“Crucially, salary sacrifice is also one of the only practical and legitimate planning tools available to taxpayers trapped in the £100,000 tax cliff edge, where the withdrawal of the personal allowance creates an effective 60% marginal tax rate between £100,000 and £125,140.

“Removing it would trap thousands of senior professionals, including NHS consultants, senior public sector staff, finance professionals and business owners. They will be in punitive tax territory with no realistic route out other than asking for lower pay.”

Despite the changes, experts urge people not to make any knee-jerk reactions, which could reduce their overall pension savings.

Andrew Marker, head of retail pensions at Vanguard Europe, said: “Based on the current guidance, despite these changes, most investors will be best off sticking to their existing plans. The exact impact will depend on your personal circumstances, however taking hasty action could leave you thousands of pounds worse off in retirement.

“For example, someone who earns £48,000, who sacrifices £5,000 of their salary, will have £3,040 less in their pension over 30 years, as a result of additional national insurance contributions. However, had they reduced the amount they sacrificed to the new £2,000 cap, their pension pot would be £23,459 less.

“The impact will be greater for those on higher earnings. Someone earning £75,000 would have £5,800 less in their pension over 30 years if they made no change to their salary sacrifice, but £67,450 less if they decided to cut their contributions all the way down to the £2,000 limit.

“Pensions remain one of the best ways for most people to save for retirement, given the tax relief on contributions, tax-free growth and tax-free cash lump sums.”