From 6 April 2029, the Government will introduce a new £2,000 cap on the amount employees can contribute to pension schemes through salary sacrifice, tax-free and National Insurance-free. Employers will be required to account for all relevant pension contribution amounts and report and pay Class 1 NICs on them. Employees who sacrifice more than £2,000 of salary or bonuses for employer pension contributions will also pay Class 1 primary NICs on the excess.
Government estimates indicate the average employee will face around £84 in additional NICs in 2029 to 2030. The Treasury expects to reduce the cost of salary sacrifice pension tax relief by £4.7 billion a year once the policy takes effect.
Salary sacrifice schemes are widely used, with around 7.7 million employees currently contributing through these arrangements. Of these, 3.3m sacrifice more than £2,000, meaning around 44% will see higher tax bills. The remaining 56% will fall below the threshold for now, although inflation and potential future freezes to allowances could increase the number affected over time.
The change will also create financial and administrative pressure for employers. Around 290,000 businesses are expected to be affected, with HMRC estimating one-off costs of £20m to update payroll systems, train staff and communicate changes to employees. Ongoing annual costs are expected to reach £30m, driven by additional calculations, record keeping and reporting requirements. HMRC anticipates minimal internal costs of around £1.9m to update systems and guidance prior to implementation.
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