Budget 2025: pension salary sacrifice capped at £2k
03/12/2025
Chancellor Rachel Reeves confirmed a major reform to salary sacrifice pension schemes – but gave savers and employers a four-year breathing space before it bites.
Starting in April 2029, National Insurance contribution (NIC) relief on pension contributions made through salary sacrifice will be capped at the first £2,000 per person each year. Any contributions above that threshold will no longer enjoy the NIC saving and will be taxed in the same way as normal pension contributions.
Why is the government doing this?
The cost of NIC relief on salary sacrifice has ballooned from £2.8 billion in 2016–17 to a projected £8 billion by 2030–31 if left unchanged. The Treasury says the current system disproportionately benefits higher and additional-rate taxpayers, making it “unsustainable”.
The new cap is expected to raise £4.7 billion in its first full year (2029–30), dropping to around £2.5 billion the following year as people and employers adjust their arrangements.
Who is protected?
- 74% of basic-rate taxpayers who use salary sacrifice will be completely unaffected because their annual pension contributions are below £2,000.
- Higher and additional-rate taxpayers who sacrifice larger amounts will lose the NIC saving on everything above £2,000.
You still have until 2029
The Chancellor explicitly delayed the start date “to give individuals and employers time to adjust”. That means the current generous NIC relief remains fully available for the next four tax years (2025/26 through 2028/29).
What could you do in the meantime?
- Maximise salary sacrifice while the full NIC relief is still available (especially attractive if you’re a higher or additional-rate taxpayer).
- Consider whether increasing contributions before 2029 makes sense for your retirement plans.
- Employers may want to review their salary sacrifice offerings and communicate the upcoming change to staff.
The government’s reassurance
Rachel Reeves emphasised that the government “will continue to support pension saving through auto-enrolment and tax relief, worth over £70 billion a year”. This change only affects the extra National Insurance saving from salary sacrifice – the core income tax relief on pension contributions remains untouched.
In summary change starts: April 2029
- Cap: £2,000 of NIC-relieved salary sacrifice pension contributions per person per year
- First-year revenue for Treasury: £4.7 billion
- 74% of basic-rate taxpayers unaffected
- Four years to plan and adapt
For most people, nothing changes until 2029 – but higher earners who make large pension contributions via salary sacrifice now have a clear deadline to review their strategy.
