Budget 2025: Changes to salary sacrifice

The Chancellor, Rachel Reeves, has delivered the 2025 Budget, announcing a new annual cap on the amount of contributions made via salary sacrifice that can receive National Insurance (NI) relief. From April 2029, the NI advantage available through salary sacrifice will only apply to £2,000 of pension contributions per employee each tax year. This gives both employers and employees time to adjust to the changes, review their existing arrangements and maximise the benefit of current salary sacrifice rules ahead of the cap being introduced. 

While further detail is expected in the coming weeks, we want to outline what this means for employers currently using or considering salary sacrifice.

A reminder of the benefits of salary sacrifice

Even with the new cap in place, salary sacrifice remains one of the most efficient ways for employers and employees to contribute to pension savings. For those making contributions within the level eligible for NI relief (i.e. £2,000 or less of pension contributions per tax year), the day-to-day experience of using salary sacrifice will not change. Salary sacrifice can still:

• Reduce National Insurance (NI) contributions for both employers and employees
• Increase take-home pay for employees
• Lower costs for employers
• Make pension contributions tax-efficient
• Support employees’ long-term financial wellbeing

Employees can still make contributions above the new £2,000 cap via salary sacrifice but any contributions above the level eligible for NI relief will be subject to employer and employee National Insurance contributions.

Employers with higher contribution rates or matching schemes may need to review how their arrangements are affected by the new cap once the full guidance is published.

Points employers should consider 

While we await the full detail of the changes, employers may find it helpful to begin thinking about a few practical steps:

• Identify whether any employees contribute more than £2,000 into their pension via salary sacrifice per tax year.
• Check how much of National Insurance savings are passed onto employees.
• Consider any updates that may be needed for payroll processes and employee communications.
• Keep an eye out for further guidance from the Treasury and HMRC, which will clarify timelines and implementation details.

These initial considerations can help ensure a smooth transition once the final rules are confirmed.

What happens next?

The government typically releases further detail in the days following the Budget. We will review all additional guidance from the Treasury and HMRC on how and when the cap will be implemented, as well as any changes employers may need to make.

Once the full guidance is published, we’ll ensure you have clear and practical next steps.

We're here to help

If you have questions about how the new salary sacrifice cap affects your pension contributions or payroll processes, our team is on hand to help. Simply get in touch with our support team via our Contact Us form, and we’ll be happy to help you navigate the changes to salary sacrifice.

About Smart Pension

Launched in 2015, Smart Pension now exceeds £10bn in Assets Under Management (AUM) and serves over 2 million members and 100,000 employers. It is powered by Keystone, Smart’s global savings and investments technology platform.

Aquiline, Barclays, Chrysalis Investments, DWS Group, Fidelity InternationalStrategic Ventures, J.P. Morgan, Legal & General Investment Management, MUFG and Natixis Investment Managers are all investors in Smart Pension.