Autumn Budget Update 3: Pension Salary Sacrifice Rules Completely Changed

In the 2025 Budget, Chancellor Rachel Reeves has announced a major shake-up to the rules around pension salary sacrifice contributions.

Under the current system, employees can give up part of their salary which instead goes into pension contributions. This not only reduces their taxable pay (saving them Income Tax and National Insurance) but also lowers the employer’s National Insurance (NI) burden, making salary sacrifice a tax‑efficient way to boost pension savings.

Starting from April 2029, the government plans to cap the amount of salary that can be diverted into pension contributions without incurring NI at just £2,000 per tax year. Any pension contributions above this threshold will once again be subject to employee and employer NI.

Who Will Be Affected

For many private‑sector employees, especially higher earners, salary sacrifice has been a key tool to fund generous pensions beyond the bare minimum contributions required by auto-enrolment. The change threatens to sap much of that incentive.

Analysis suggests the impact could be significant. For instance, someone earning around £50,000 a year who wants to redirect a substantial portion of their salary into pension contributions would now lose most of the NI savings once the amount sacrificed exceeds £2,000.

Meanwhile, many employers say the cap may lead them to reduce contributions or ditch salary sacrifice schemes entirely to avoid increased payroll costs.