In the Autumn Budget 2025, the then chancellor Rachel Reeves announced a £2,000 cap on salary sacrifice pension contributions to come into effect in 2029. Learn about the proposed changes and how this may affect you, and your workplace pension.
What are salary sacrifice pension contributions?
Salary sacrifice pension contributions are a tax efficient way of saving for your future by making contributions to your workplace pension.
Your pension contribution is taken from your salary before tax is calculated, therefore reducing your salary and the tax deducted from your pay. The result is that you pay less tax on your income, which is the equivalent of receiving tax relief on your pension contributions without having to do anything.
What is the £2,000 cap on pension contributions?
Currently, any pension contributions made via salary sacrifice will be exempt from National Insurance contributions. From 6th April 2029, a £2,000 cap will come into effect, resulting in National Insurance being deducted from your payslip on any contributions over the annual £2,000 limit.
Who benefits from salary sacrifice?
Many people use salary sacrifice pension contributions as an effective tool for reducing tax liabilities (such as staying within their current tax bracket, or avoiding the High Income Child Benefit Charge) and ensuring they are saving as much as possible for retirement.
Additionally, some employers may match contributions, or pass on National Insurance savings, further boosting your pension pot.
How will the pension contribution cap affect me?
If you use salary sacrifice to reduce your tax liability, receive tax free childcare or child benefit then you can keep doing so, but you will be subject to employer and employee NICs on employee salary sacrifice contributions over £2,000.
For example a 10% contribution from a £110,000 annual salary would restore your lost personal allowance due to the tapered annual allowance. However, from 6th April 2029 you will be liable to paying NI on £8,000 of that pension contribution if the contributions are made via salary sacrifice.
How will the pension contribution cap affect employers?
This change could mean that employers may will change their pension offering due to the changes affecting the tax advantages of the salary sacrifice schemes.
Employers could also respond to the new rules by increasing the standard contractual level of employer contributions and reducing pay or limiting pay rises.
Seek professional financial advice
The changes to workplace pensions may not affect everyone, but if you are contributing more than £167 a month to your workplace pension via salary sacrifice, or you plan to, then you should seek professional financial advice to thoroughly assess your options. The sooner you act the better to ensure you make the most of the current rules.
RISK WARNING
Tax treatment varies according to individual circumstances and is subject to change.
The Financial Conduct Authority does not regulate tax advice.
Occupational pension schemes are regulated by The Pensions Regulator.
The value of pensions and investments and the income they produce can fall as well as rise and you may not get back the full amount you invested.
