There is a change coming to pension salary sacrifice that does not get nearly enough attention, and April 2029 has a habit of feeling a long way off right up until it is not.
From 6 April 2029, National Insurance relief on pension salary sacrifice will be capped at £2,000 per year. It is a meaningful restriction for higher earners, worth understanding clearly — and worth planning for now rather than later.
What is actually changing
Currently, an employee who sacrifices salary into their pension pays no income tax and no NIC on the sacrificed amount. Their employer also pays no employer’s NIC. Everyone benefits, with the advantage scaling up the more the employee contributes.
From April 2029, the NIC relief for employees will be capped at contributions of £2,000. Any pension salary sacrifice above that threshold will attract employee NIC at the normal rate: 8% on earnings up to the upper earnings limit of £50,270, and 2% above that.
Income tax relief is completely unaffected. The £60,000 annual allowance is unaffected. Employer NIC savings are unaffected. And employer contributions made outside of salary sacrifice are entirely unaffected — this cap applies specifically and only to employee pension contributions made through sacrifice.
What this means in practice
Take someone earning £65,000 who currently sacrifices £5,000 per year into their pension.
Under the current rules, they save income tax at 40% on the full £5,000 (a saving of £2,000) and NIC at 8% on the full £5,000 (a saving of £400). Their take-home pay reduces by £2,600, not £5,000.
From 2029-30, the income tax saving stays exactly the same — £2,000 on the full £5,000. But the NIC relief only applies to the first £2,000 of sacrifice, saving £160. The remaining £3,000 attracts NIC at 8%, costing £240. The net NIC position moves from a saving of £400 to a net cost of £80.
The arrangement is still well worth doing. The income tax relief alone makes it significantly more efficient than contributing from net pay. But it is less attractive than before, particularly for higher earners contributing large sums.
For a basic-rate taxpayer sacrificing £2,000 or less annually, nothing changes at all.
The bigger picture for higher earners
For employees earning above £100,000, salary sacrifice has always carried an additional benefit – reducing gross pay to manage the personal allowance taper, which erodes the £12,570 personal allowance on earnings between £100,000 and £125,140 at an effective marginal rate of 60%. That income tax benefit is entirely unaffected by the 2029 changes.
High earners using sacrifice for this purpose should take professional advice on their individual circumstances. The combination of income tax relief at an effective 60%, reduced to an 80p-in-the-pound cost rather than the standard rate, remains substantial.
What else is still fully available
It is worth being clear about what the 2029 changes do not touch.
Electric vehicle salary sacrifice remains completely unaffected. With a benefit-in-kind rate of 4% for EVs in 2026-27, rising gradually to 9% by 2030-31, and full income tax and NIC relief with no caps, EV schemes continue to offer outstanding value. An employee in the 40% tax bracket running a £40,000 electric vehicle through salary sacrifice is making savings that are difficult to replicate any other way.
Cycle to work schemes are similarly unaffected, exempt from both OpRA rules and the pension changes.
Planning strategies worth considering now
The most straightforward response to the 2029 pension cap is to pair salary sacrifice pension contributions up to £2,000 with an EV scheme where possible. This captures full NIC relief on the pension element while accessing the most tax-efficient vehicle option available.
For employees currently contributing above £2,000 through sacrifice, it is worth modelling whether the same total pension contribution is better achieved partially through sacrifice (up to £2,000) and partially through regular employer contributions or personal contributions with tax relief claimed through self-assessment.
There is time to plan. Three years is enough runway to review your current arrangements, model the impact for different employee groups, and make adjustments gradually. The businesses that will find this disruptive are the ones that leave it until 2028.
A note on employer NIC
The cap applies to employee NIC relief. Employer NIC savings on pension salary sacrifice are also affected — employers currently save 15% on sacrificed amounts, and from 2029, they will only save that on the first £2,000 per employee. For employers with staff contributing significant pension amounts through sacrifice, this is worth factoring into benefit cost modelling ahead of the change.
If you would like to understand how the April 2029 changes affect your current payroll setup, or you want to review your salary sacrifice arrangements ahead of the change, get in touch with the team.
