Salary sacrifice pensions: What you need to know now

From April 2029, the National Insurance (NI) relief on salary sacrifice pension contributions will be capped at £2,000 a year, meaning contributions above this threshold will start attracting NI.

While the change is still a few years away, now is the ideal time to review your pension strategy and make the most of the current rules.

What is salary sacrifice?

Salary sacrifice is an agreement with your employer where you give up part of your gross salary or bonus in exchange for an equivalent pension contribution paid directly by your employer. Because the contribution is made before income tax and NI are applied, it creates an immediate saving.

For years, salary sacrifice has been one of the most efficient ways to build a pension. It reduces the income on which you pay tax, lowers your NI bill and can reduce your employer’s NIC liability too.

Many employers pass part of that saving back to staff by increasing their pension contribution. The result is a larger pension pot without reducing your take-home pay by the same amount.

Almost 8 million workers across the UK use these schemes, and they have become a standard part of retirement planning for employees who want to make the most of available tax benefits.

What changes in April 2029?

The Autumn Budget confirmed that from April 2029, only the first £2,000 of pension contributions made through salary sacrifice each tax year will remain exempt from NI. Anything above that limit will attract:

• 8% NI for basic rate taxpayers
• 2% NI for higher rate taxpayers
• 15% employer NI on the same amounts

The government has introduced the cap to limit the use of salary sacrifice for large contributions, particularly where significant portions of salary or bonuses are moved into pensions.

For many people, especially those earning above £40,000, this may mean rethinking how they save for retirement. The Office for Budget Responsibility expects the change to raise £4.7bn in extra NICs in 2029 alone.

Why you should review your pension planning now

Although the rules only come into effect in April 2029, this is an important moment to reassess how you save and determine whether salary sacrifice is still the most efficient route for you. Acting early allows you to take advantage of the current NIC savings while planning for adjustments over the next few years.

For some, this may mean bringing forward larger pension contributions while they remain fully NIC-exempt. Others may benefit from reviewing director pension contributions, employer-funded pension strategies or alternative methods of saving.

How the change could affect you

Someone earning £50,000 and sacrificing 5% of their pay could see an extra £40 a year in employee NI from 2029. While this may seem small, the impact grows with higher contribution levels and higher salaries.

Under the current rules, some individuals use salary sacrifice to shelter part of an annual bonus from NI. From 2029, contributions above £2,000 will no longer receive that benefit. This will reduce the appeal of using bonus sacrifice as a planning tool.

We’d recommend speaking with your financial adviser before making decisions regarding your pension contributions.

Proper planning is essential to ensure your pension contributions and long-term tax position remain as efficient as possible under the new rules. Get in touch with our expert advisers today on +44 (0) 20 7759 7553 or email [email protected].