Salary sacrifice pension changes: what the £2,000 cap means for employers

Written by Jenna Lightfoot

Head of Payroll Operations

Last reviewed 3 November 2026 5 min read Editorial policy

From 6 April 2029, only the first £2,000 a year of pension contributions made through salary sacrifice stays exempt from National Insurance. Anything above that attracts employer and employee NI, while income tax relief and standard employer contributions are unchanged.

Announcements made during the 2025 budget set out plans for major changes to workplace pensions^[1]. Those changes are due to take place in 2029, which means now is the perfect time to start preparing your payroll teams for what’s to come.

Think 2029 is ages away? Think again. Here’s everything you need to know, and act on now, before the changes begin.

How pension salary sacrifice works today

As things stand, salary sacrifice pensions work by the employee reducing their contractual cash salary, and this money instead being paid directly into their pension scheme via their employer.

This saves both parties money, with the employee paying less income tax, and both employee and employer paying less National Insurance.

Employers save 15% on every pound^[6] put into a pension scheme, and many choose to add these savings to their employees’ retirement funds. Right now, there is no limit on these NI savings. That’s about to change.

What is changing in 2029?

The policy was announced in the Autumn Budget 2025 and became law in April 2026^[3], changing the way businesses operate salary sacrifice pension schemes.

From April 2029, the government will introduce^[4] an annual limit of £2,000 on pension contributions made through salary sacrifice that can be free of National Insurance. Any sacrifices up to £2,000 will stay exactly as they are today, but if an employee goes above that amount^[2], the excess will be subject to both employee and employer NI. It will still remain free of income tax.

This change will only apply to the salary sacrifice element of the pension contribution. The employer only element will stay the same.

Who will this affect?

According to data from GOV.UK^[2], there are around 7.7 million employees who currently benefit from a salary sacrifice pension scheme. However, not all of these people will be affected when the changes take place, as the £2,000 cap will mainly impact middle and higher earners who look to max out their pension allowances.

Currently, 3.3 million people sacrifice more than £2,000^[2] into their pensions each year, and it’s those people who’ll notice the changes the most.

What it costs the employer: a worked example

The main difference employers will notice is an increase in payroll costs. This example shows what will change for an employee sacrificing £6,000 a year into their pension, using the standard employer NI rate of 15% and today’s employee NI main rate of 8%^[6]. Your employee will feel it too, and because many business owners and directors are paid through payroll themselves, they’ll feel the impact personally as well.

	Current rules	Post April 2029 rules
Total annual salary sacrificed	£6,000	£6,000
Amount exempt from NI	£6,000	£2,000
Amount subject to employer NI	£0	£4,000
Employer NI rate	15%	15%
Annual employer NI cost	£0	£600
Employer NI saving realised	£900	£300
Amount subject to employee NI	£0	£4,000
Annual employee NI cost (8% main rate)	£0	£320
Employee NI saving realised (8% main rate)	£480	£160

What payroll and HR teams will need to do

There are a few changes your payroll will need to handle from April 2029. Knowing them now gives your payroll and HR teams time to adjust and to make sure your payroll software is up to the challenge.

Track the cumulative salary sacrifice amounts for every employee, per employment, across the tax year.
Apply NI from the moment an employee’s year to date salary sacrificed amount crosses the £2,000 mark. This starts in April 2029, so for now it’s about understanding how it will work and preparing for it.
Report the total amounts sacrificed to HMRC. Exactly what will need to be reported, and how, will be confirmed when the regulations are published^[2].

What employers should do now

2029 might seem like the distant future, but there’s work you should do now to ensure you’ve got everything ready to go when the changes take place. After all, no one wants to be hit with a surprise brown envelope from HMRC asking for money they weren’t planning to pay.

There are three steps employers should take to prepare:

Look at your current payroll. See how many of your team are exceeding the £2,000 limit, understand what that excess figure looks like, and do the manual calculations so you’ll know how much extra you should be expecting to pay.
Check your current pension policies. If you are currently passing on 100% of NI savings back to your employees, that will change on any amounts over the £2,000 cap, so you’ll need to adjust your language to make this clear.
Keep your eyes peeled for further guidance. HMRC is due to publish the regulations and guidance on how the cap will be administered, while your payroll provider should offer advice on how your payment systems can adapt to support the change.

Where does the legislation currently stand?

This policy was first introduced into Parliament as the National Insurance Contributions (Employer Pensions Contributions) Bill after the 2025 Budget. It faced a lot of scrutiny, especially from the House of Lords, who voted to increase the cap from £2,000 to £5,000 and to exempt small and medium sized businesses and charities^[5]. However, the House of Commons rejected these amendments, and the bill received Royal Assent in April 2026^[3].

That leads us to where we are now. This policy is now signed into law, so it’s time for employers to start planning how to manage it with confidence, without having to worry whether politicians will change their minds.

Frequently asked questions about salary sacrifice changes

What are the changes to salary sacrifice pensions?

From 6 April 2029, only the first £2,000 of pension contributions made through a salary sacrifice arrangement will be exempt from employee and employer National Insurance. Any amount over this limit will have normal employee and employer National Insurance charges applied to it.

When do the salary sacrifice changes start?

These changes start on 6 April 2029, following legislation that passed into law in April 2026.

Will salary sacrifice be scrapped?

No. Salary sacrifice will still be an option to save for retirement. The only thing that’s changing is the National Insurance exemption.

Does the cap apply to employer pension contributions?

The £2,000 cap applies to employer pension contributions that come through a salary sacrifice. Standard employer pension contributions stay free of employer National Insurance.

Does the cap affect electric car or cycle to work schemes?

No. This £2,000 cap is only for pension contributions made via salary sacrifice, other benefits such as electric cars and cycle to work schemes will remain unaffected.

Sources

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