New £2,000 Cap on Salary Sacrifice Pension NIC Relief: What UK Businesses Need to Know
🔍 Understanding the Autumn Budget 2025 Pension Changes
The Autumn Budget 2025 introduced a significant change for workplace pension arrangements, specifically targeting the National Insurance Contributions (NICs) relief available through Salary Sacrifice schemes.
While the change is not immediate, it requires employers and high-contributing employees to start planning now. The government is introducing an annual cap on the amount of employee pension contributions made via salary sacrifice that is exempt from NICs.
📅 The Key Date: April 2029
The new rule regarding the cap on NIC relief will take effect from the start of the 2029/2030 tax year, giving businesses a long lead time (over three years) to review their schemes and update payroll systems.
What is Salary Sacrifice for Pensions?
Salary sacrifice is a contractual arrangement where an employee agrees to reduce their gross salary by a certain amount. In exchange, the employer agrees to pay the equivalent amount (or more) as an enhanced contribution directly into the employee’s pension fund.
This arrangement is highly tax-efficient because the contribution is made before Income Tax and National Insurance Contributions (NICs) are calculated. This saves both the employee and the employer money on NICs, on top of the standard Income Tax relief.
The Change: NIC Exemption Capped
From April 2029, the employee contribution portion made through a salary sacrifice arrangement will have its NIC exemption capped at £2,000 per employee per year.
- The First £2,000: This amount remains entirely exempt from both employee and employer NICs.
- Contributions Above £2,000: Any portion of the salary sacrifice contribution that exceeds this £2,000 annual limit will become subject to standard Employer and Employee NICs.
Crucially: All contributions remain exempt from Income Tax (subject to the usual Annual Allowance limits).
Who is Affected by the New Cap?
This measure is specifically aimed at limiting the tax advantage for middle and higher earners who use salary sacrifice to make substantial pension contributions.
The government stated that most employees making typical contributions will not be affected.
| Employee Scenario | Annual Salary Sacrifice Contribution | NIC Impact from April 2029 |
| Low/Basic Earner | £1,800 | Unaffected. Contribution is below the £2,000 cap. |
| Higher Earner (Example) | £5,000 | £3,000 of the contribution (£5,000 – £2,000) will now incur Employee and Employer NICs. |
💡 Action Plan for Cloud-Based Businesses
As a cloud-based, paperless company, proactive planning is essential to ensure your digital systems are ready for the 2029 change.
- Review Scheme Generosity: Employers should assess whether their current scheme allows employees to sacrifice more than the £2,000 limit.
- Payroll Software Update: You will need to coordinate with your payroll software provider well in advance of April 2029 to ensure systems are updated to correctly calculate the NIC liability on contributions above the £2,000 cap.
- Communication Strategy: Develop a clear communication plan to inform affected employees about how their take-home pay or overall pension contribution might be impacted.
- Long-Term Strategy: Although salary sacrifice remains highly beneficial (due to the Income Tax exemption and the first £2,000 NIC relief), some employers may need to consider restructuring their remuneration packages or pension matching to offset the increased NIC costs.
At Mann Accounting Services Ltd, we specialise in helping cloud-based businesses navigate complex UK tax changes. The long lead time on this salary sacrifice cap provides an excellent opportunity for strategic planning. Contact us today to review your current scheme and ensure your business and employees are prepared for 2029.
