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Back in the 2025 Autumn Budget, the government announced a cap on salary sacrifice pension contributions, starting from April 2029. Whilst this change isn’t immediate, employers and members alike will be wondering exactly how this will affect them.
The answer to that is currently a little unclear, as the details are still evolving. But what we do know is that salary sacrifice will continue to offer a range of significant advantages for both employers and members.
What are the proposed changes to salary sacrifice pensions?
The government has set out plans to charge National Insurance (NI) on salary sacrifice pension contributions above £2,000 from April 2029.
Since then, peers in the House of Lords voted to raise the proposed cap to £5,000 – more than doubling the initial limit. However, this was rejected in the House of Commons.
At Standard Life, we’re keeping a close eye on this and any further developments. We believe that salary sacrifice is one of the most effective and straightforward ways for members to build their retirement savings, and we’ll continue to champion changes that help long-term savers achieve better outcomes.
How do employers currently benefit from salary sacrifice?
Savings on NI contributions
Depending on how many members are in a client’s workplace pension scheme, annual NI savings could quickly add up. This is because the salary members sacrifice doesn’t count towards NI contributions.
These savings could be reinvested back into the business, or they could choose to pass these savings onto members by paying the money into their workplace pension plan.
Reduced impact of financial stress
Money worries can impact members’ mental health, which could have a knock-on effect on their productivity at work. Given that a salary sacrifice pension effectively increases members’ take-home pay, it could provide a much-needed boost to both their pockets and wellbeing.
Improved recruitment and retention
Employers aren’t obliged to offer salary sacrifice, so if they do, it could make them stand out from the crowd when recruiting.
The same goes for existing staff too; they’ll be more likely to stay put if they offer a comprehensive and flexible employee benefits package.
How do members currently benefit from salary sacrifice?
Tax relief on pension contributions
Because part of a member’s salary is exchanged for a pension contribution, their salary is reduced – meaning they’ll pay less in Income Tax and NI. As a result, they get to keep more of their take-home pay whilst still saving into their workplace pension scheme.
Bonus sacrifice could offer a boost
If members get a bonus, they could also consider using salary sacrifice to put some or all of it into their pension plan. This could give their pension pot a significant one-off boost and allow them to keep more of their money.
How will the post-2029 changes affect employers?
NI savings will be capped – but not removed
From April 2029, employers will continue to benefit from NI savings on salary sacrifice pension contributions up to the £2,000 capped amount. While savings above the cap will be reduced, salary sacrifice will still deliver some annual savings. It can still serve as a valuable part of their reward and benefits package too.
Communicate and plan early
There’s plenty of time to prepare for the upcoming and put effective plans in place.
For instance, if your clients usually pay bonuses later in the year, it may be worth bringing this forward into March for 2029.
Your clients may also want to use this time to communicate the overarching benefits of salary sacrifice to members. Some members may mistakenly think that the new cap means there are no tax efficiencies to using salary sacrifice and lower their contributions or opt out as a result. So early and clear communication is key here.
How will the post-2029 changes affect members?
Consider maximising NI savings now
Now’s a good time for members to maximise their NI savings before the changes take effect in April 2029 (if it’s affordable and right for them).
After April 2029 – and based on the current proposal – members who sacrifice more than the £2,000 cap into their pension will pay 8% in NI on earnings up to the Upper Earning Limit (UEL), and 2% on earnings above the UEL.
Tax relief still remains
The upcoming changes don’t alter the fundamental benefits of salary sacrifice pensions – they’re still a tax-efficient way for members to save for retirement.
Although NI will apply to contributions above the cap, salary sacrifice will remain beneficial for members – particularly for those contributing within the capped limit. For members contributing more, like other pensions, Income Tax savings will still apply – and they’ll still benefit from employer pension contributions.
To read more articles from Standard Life visit the content hub on Corporate Adviser – here.
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For more information on how to support members, take a look at our articles for some ideas and inspiration.
Remember, a pension plan is an investment. Its value can go down as well as up and could be worth less than what was paid in.
Tax rules may change in the future. Tax treatment depends on the individual’s circumstances including where they live in the UK.
The information here is not financial advice.
Phoenix Life Limited, trading as Standard Life, is registered in England and Wales (1016269) at 10 Brindleyplace, Birmingham, B1 2JB.
Phoenix Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
