Salary Sacrifice Pensions: The 2029 National Insurance Cap Explained
A salary sacrifice pension has been the most efficient way for employees to pay into a pension, because the salary given up escapes both income tax and National Insurance. From 6 April 2029, the HMRC pension salary sacrifice cap limits the National Insurance advantage to £2,000 per employee per tax year. Income tax relief is unchanged, and ordinary employer pension contributions keep their full National Insurance relief. The salary sacrifice pension changes were announced at Budget 2025 and left as they were at the Autumn Budget 2026, so employers have three more tax years on the current rules.
What Is a Salary Sacrifice Pension and How Does It Work Now?
So what is a salary sacrifice pension? It works like this: an employee agrees to a lower contractual salary and the employer pays the difference into their pension as an employer contribution. Because the employee never receives the sacrificed amount as pay, there is no income tax on it and no National Insurance on either side.
Most other salary sacrifice arrangements lost their tax advantages in April 2017. Pensions were deliberately left out of that change, which is why salary sacrifice pensions have grown so quickly. HMRC estimates that 7.7 million employees now use it, and that 3.3 million of them sacrifice more than £2,000 a year.
For 2026/27, the National Insurance saved on each £1 sacrificed is:
- Employer: 15p, on earnings above the £5,000 secondary threshold
- Employee: 8p on earnings between £12,570 and £50,270, and 2p above that
The employer's share of the saving is the larger one, and for higher earners it is several times the employee's. Some employers keep it; others add part or all of it to the employee's pension. Either way, it is the employer's side of the calculation that changes most in 2029.
A salary sacrifice pension also reduces taxable pay, and with it adjusted net income. That matters for the £100,000 personal allowance taper, the high income child benefit charge and eligibility for Tax-Free Childcare.
Salary sacrifice pension changes from 6 April 2029
Under the HMRC pension salary sacrifice cap, the first £2,000 of pension contributions made through salary sacrifice in each tax year from 6 April 2029 remains free of National Insurance. Anything sacrificed above £2,000 is treated as earnings for National Insurance purposes, so Class 1 contributions are due from both the employee and the employer on the excess.
Three things do not change. Income tax relief on the full sacrificed amount continues. National Insurance relief on ordinary employer pension contributions — those not made in exchange for giving up salary or a bonus — continues in full. And the sacrifice still reduces adjusted net income, so its effect on the personal allowance taper and child benefit is unaffected.
The HMRC pension salary sacrifice cap applies per employee and covers bonuses given up as well as regular salary. The detailed mechanics, including how the £2,000 is tracked through payroll, will be set out in secondary legislation after engagement with employers and payroll providers. HMRC expects around 290,000 employers to need to change their processes.
The government's estimate is that the salary sacrifice pension changes raise around £4.8 billion in 2029/30, falling to about £2.6 billion the following year as employees and employers adjust. That second figure is the useful signal: many arrangements will be reduced or restructured rather than continued as they are.
What a salary sacrifice pension costs: three examples
These examples use 2026/27 National Insurance rates for illustration, because 2029/30 rates have not been set. Each assumes the whole sacrifice falls within a single National Insurance band.
| Employee A | Employee B | Employee C | |
|---|---|---|---|
| Salary before sacrifice | £40,000 | £70,000 | £150,000 |
| Amount sacrificed | £4,000 | £10,000 | £40,000 |
| NI saved now (employee + employer) | £320 + £600 = £920 | £200 + £1,500 = £1,700 | £800 + £6,000 = £6,800 |
| NI saved from April 2029 | £160 + £300 = £460 | £40 + £300 = £340 | £40 + £300 = £340 |
| Extra NI a year | £460 | £1,360 | £6,460 |
For Employee A, the extra £460 is £160 for the employee and £300 for the employer. For Employees B and C, nearly all of it falls on the employer, because the employee's National Insurance rate above £50,270 is 2% while the employer's is 15%.
At business level the numbers add up quickly. A company with 20 employees each sacrificing £5,000 a year, all in the 8% band, would pay about £9,000 more employer National Insurance a year, and its staff about £4,800 more between them.
Under the new rules the National Insurance saving per employee is effectively fixed: at 2026/27 rates, £460 a year where the employee pays 8%, or £340 where they pay 2%.
Owner-directors and ordinary employer contributions
For most owner-managed companies, the salary sacrifice pension changes matter less than the headlines suggest. The typical director takes a modest salary and dividends, and the company pays pension contributions directly. A contribution the company makes without the director giving up any salary or bonus in exchange is an ordinary employer contribution, not salary sacrifice. It is free of National Insurance now and will remain so after April 2029.
Employer contributions are normally deductible for corporation tax where they form part of a director's remuneration for work done for the company. For a working director, HMRC looks at whether the package as a whole is commensurate with the work. Tax relief for the individual is limited by the annual allowance of £60,000 for 2026/27, which is reduced for the highest earners, with unused allowance from the previous three years available to carry forward.
The HMRC pension salary sacrifice cap does apply where a director has a formal arrangement to give up salary or a bonus in return for a pension contribution, which is more common in larger companies and in groups with employee-wide schemes. In that case the director is treated like any other employee.
The board can change how remuneration is structured, but the change should be genuine, agreed in advance and documented properly. Relabelling an existing sacrifice as an employer contribution without changing its substance is not the same thing, and should not be treated as if it were.
What employers with a salary sacrifice pension should do before April 2029
Three tax years is long enough to adjust salary sacrifice pension arrangements in an orderly way, and short enough that it is worth starting now.
- Find out who is affected. List employees sacrificing more than £2,000 a year, including through bonus sacrifice. Many schemes have a handful of high contributors and a long tail below the cap.
- Check what you have promised. If scheme literature, contracts or the staff handbook say the employer's National Insurance saving is passed into pensions, decide whether that continues once the saving shrinks.
- Talk to your payroll provider. Software will need to track the £2,000 per employee per tax year and calculate National Insurance on the excess. The detail is still to be published, so check the provider is planning for it.
- Budget the cost. The examples above give an order of magnitude; your payroll data will give the actual figure for 2029/30.
- Communicate early. Some employees will reduce their sacrifice once the saving falls. They keep full income tax relief however contributions are made, and the sacrifice still reduces adjusted net income, which matters most for anyone near £100,000 or claiming child benefit.
None of the salary sacrifice pension changes apply before 6 April 2029. Arrangements in 2026/27, 2027/28 and 2028/29 continue under the current rules. If you would like the salary sacrifice pension changes worked through for your own payroll, our tax services team can do it alongside the annual review of directors' pay.
Frequently Asked Questions
What is a salary sacrifice pension?
It is an arrangement where an employee agrees to a lower contractual salary and the employer pays the difference into their pension as an employer contribution. Because the employee never receives the sacrificed amount as pay, there is no income tax on it and no National Insurance on either side. From 6 April 2029, the National Insurance saving is capped at £2,000 per employee per tax year.
When does the HMRC pension salary sacrifice cap start?
On 6 April 2029, the start of the 2029/30 tax year. Until then, pension salary sacrifice continues to save employee and employer National Insurance on the full amount, subject to the usual rules such as not taking pay below the National Minimum Wage.
Does the £2,000 cap apply to employer pension contributions?
Only to employer contributions made in exchange for salary or a bonus given up by the employee. HMRC's policy paper confirms that National Insurance relief on ordinary employer contributions, outside a sacrifice arrangement, is unchanged.
Is a salary sacrifice pension still worth it after April 2029?
For many employees, yes. The first £2,000 a year stays free of National Insurance, income tax relief continues on the full amount, and the sacrifice still reduces adjusted net income. Above £2,000 the National Insurance advantage disappears, so the comparison with other ways of contributing becomes closer.
Will salary sacrifice still help with the £100,000 personal allowance taper?
Yes. HMRC has confirmed that the change does not alter the effect of salary sacrifice on adjusted net income. A sacrifice that brings adjusted net income below £100,000 still restores personal allowance, even if part of it now attracts National Insurance.