By: Jonathan Berger, Laurie Eggleston
27 Aug 2026 8 min read
HMRC has confirmed a restriction to the NIC savings on pension salary sacrifice from 6 April 2029. This will be capped at £2,000 of salary sacrificed pension contributions per employee, per tax year. Until then, the current NIC treatment continues in full, so there remains a substantial window in which to benefit from the savings that it brings.
Now is the time to consider changes to current pension salary sacrifice arrangements, as well as introducing it for the first time if you have not done so already.
Experience shows that higher and additional rate taxpayers eligible to claim income tax relief through their Self-Assessment tax returns often fail to do so.
By simply changing the method by which pension contributions are made, significant savings for both the employer and employees can be achieved, while significantly simplifying how tax relief is granted for employees. For employees, therefore, participation in pension salary sacrifice can result in a welcome boost to their take-home pay each month.
Pension salary sacrifice (also referred to as Pension Salary Exchange or Smart Pensions) is an income tax/NIC efficient and Auto-Enrolment compliant arrangement that can be used for pension contributions to reduce both the employee’s and employer’s NICs liabilities while ensuring income tax relief is received at source (ie via the payroll) for participating employees. The NIC savings are made on each payroll cycle, and the arrangement can be applied to the majority of workplace pension schemes.
An employee agrees to a reduction in their contractual pay equivalent to the amount of their gross pension contribution. In return, the employer makes an additional employer’s pension contribution to the pension plan equivalent to the level of the sacrifice to the employee’s contractual pay, in addition to their regular employer pension contribution. As a result, the participating employee and the employer now pay NICs on the employee’s adjusted pay after the salary sacrifice. Employers currently pay NICs on an employee’s salary at 15% and employees currently pay NIC at 8% (on earnings of up to c.£50,000) or 2% (on earnings over c.£50,000). Pay reviews and any salary-related benefits can, however, continue to be based on the original level of salary, prior to the salary sacrifice adjustment.
Following the Autumn Budget 2025 announcement and Royal Assent on 29 April 2026, the NIC exemption on salary sacrificed pension contributions will be capped at £2,000 per employee, per tax year, from 6 April 2029.
Employees will still be able to sacrifice any level of salary into their pension, and Income Tax relief on those contributions is unaffected. However, salary sacrificed in respect of pension contributions above £2,000 in a tax year will no longer be exempt from NICs. The excess will instead be subject to employer NIC (currently 15%) and employee NIC (8% up to the Upper Earnings Limit, 2% above it), in the same way as a standard employee pension contribution. There will still be a saving for employees and the employer, and there is therefore still an advantage to take benefit from. Employers who choose to withdraw such arrangements will therefore lose out, as will their employees.
Importantly, the change targets the salary sacrifice mechanism, not pension saving generally. Employer pension contributions made outside of salary sacrifice, including matched or enhanced employer contributions, remain free of NICs.
The greatest impact will fall on higher earners and on employees in schemes with generous employer-matched salary sacrifice arrangements, where contributions well above £2,000 are common.
There is much that needs to be confirmed prior to the restrictions to the NIC savings on pension salary sacrifice contributions. Further guidance is awaited from HMRC on matters such as:
HMRC has said it will publish further guidance and draft regulations before April 2029.
Implementing pension salary sacrifice requires an effective change in employees’ terms and conditions of employment. This can be achieved without the requirement to issue new contracts of employment or side letters. However, employers need to be able to demonstrate that employees fully understand and consent to the change, for it to be valid.
It's therefore vital that the approach taken to document and enact the change is introduced and applied correctly and that payroll teams fully understand the changes.
Virtually all payroll software packages have functionality to accommodate pension salary sacrifice. In addition, HMRC guidance supports the introduction of pension salary sacrifice and they do not require employers introducing such arrangements to approach them for clearance.
Historically, the implementation of pension salary sacrifice often saw businesses seeking consent from employees, however, it is now more commonly implemented through ‘negative affirmation’ which speeds up the process and increases take up, often to around 95%. Current arrangements may also benefit from adopting this approach to maximise take-up by new joiners and at the next enrolment window for current pension member employees.
Similar savings can also be made where there is waiver of entitlement to a discretionary bonus, often called bonus sacrifice. Consideration of timing, contracts and entitlement are key, as well as whether the recipient is a director, as different rules apply to directors. Advice is therefore recommended to ensure such arrangements are set up correctly, and well in advance of discretionary bonuses being agreed.
Learn more about how our Employee benefits services can help you: Visit our Employee benefits page
The following illustrations provide an indication of the annual NICs and Apprenticeship Levy savings available. It shows, based on salaries of £25,000, £40,000 and £60,000 per annum and pension contributions of 5%, the savings that can be generated by participating in pension salary sacrifice.
For example, for an employer with 150 employees on an average salary of £25,000, would potentially save over £29,000 per annum for the business based on NIC rates from 6 April 2026.
|
Salary Per Annum |
£25,000 |
£40,000 |
£60,000 |
|
Contribution Percentage |
5% |
5% |
5% |
|
Contribution Amount Per Annum |
£1,250 |
£2,000 |
£3,000 |
|
Employee NIC Rate |
8.0% |
8.0% |
2.0% |
|
Employee Savings* |
£100 |
£160 |
£60 |
|
Employer Savings (NIC & Apprenticeship Levy) |
£193.75 |
£310 |
£465 |
* Calculated as Employee’s NIC Rate x contribution amount, per annum
Calculated at Employer NIC rate of 15% plus Apprenticeship Levy of 0.5% (for large employers) x contribution amount, per annum. Where employers are not liable to the Apprenticeship Levy, estimated savings would be 0.5% less.
These illustrations reflect the position that applies until 5 April 2029 and based on rates at 6 April 2026.
Employers may be searching for ways to improve and enhance their benefits offering without incurring additional costs. Pension Salary Sacrifice and Bonus Waiver can be a much-welcomed benefit for employees and can help to create a budget for additional new benefits, or mitigate increased employment costs. Pension Salary Sacrifice may not be right for all employees, particularly the lower paid, which is why it's crucial to take advice regarding the suitability for your workforce.
With the £2,000 cap now confirmed for April 2029, this is also the right time to model the future impact on higher earners and matched-contribution schemes, and to build the change into contract, payroll and communications planning well ahead of the deadline.
We can help advise employers on how best to implement Pension Salary Sacrifice arrangements for the first time as well as to review current arrangements to ensure they are optimised fully, the scheme rules and documentation remain up to date, and schemes are fully compliant and effective for tax/NIC purposes. Our approach ensures that what can be seen as a complex concept is presented clearly and concisely, both for employees to help them make a fully informed decision, as well as all stakeholders within a business. Mistakes in this area can be time-consuming and expensive to correct, so we’d always encourage employers to reach out if they have any concerns.
We can also help explore which other Salary Sacrifice benefits, such as holiday trading, or Cycle to Work, could form a key part of your wider employee reward package.
For more insight and guidance, get in touch with Jonathan Berger and Laurie Eggleston.
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