Budget 2025: Pension salary sacrifice cap explained
The Government has announced in its 2025 Budget a key change to pension salary sacrifice arrangements that could alter how many workers save for retirement.
Under the new rules the Government will cap National Insurance (NI) relief, on pension contributions made through salary sacrifice, at £2,000 per year from 2029 onwards. Any pension contributions made via salary sacrifice above that threshold will become subject to employee and employer NI.
Salary sacrifice is a widely used, additional tax-efficient method for pension saving. Under the system, employees voluntarily give up part of their salary, and employers make equivalent pension contributions instead.
Because the contributions are made before tax and before NI, both the employee and employer save on NI contributions.
By limiting the tax-advantaged benefit to only the first £2,000 of contributions, the measure disproportionately affects those making larger pensions contributions, often higher earners or those focusing their financial plans on building retirement savings.
For them, the effective cost of contributing to a pension will rise once the cap is breached. Industry analysis suggests that for many this will translate into reduced pension contributions over time, which would shrink eventual pension pots and worsen retirement outcomes.
Salary sacrifice encourages retirement saving by offering a simpler, more efficient route to benefit from pension tax relief and reduced NI.
The cap may therefore soften that incentive, particularly for workers who previously used salary sacrifice to channel significant sums into their pension funds. Some employers may also adjust their pension offerings or shift contribution plans in response.
For long-term savings plans the implications depend on your individual circumstances. Employees making more modest pension contributions may hardly be affected by the cap. It is also important to understand if your employer even offers pension salary sacrifice at all.
But if you are aiming to build a substantial workplace pension pot, the change could require rethinking your savings approach.
You might need to contribute outside salary sacrifice or explore other tax-efficient pension vehicles, while also accounting for reduced take-home pay if additional NI becomes payable.
If you have been relying on salary sacrifice to maximise pension savings, the cap announced could materially affect your long-term retirement outcomes. The good news is that the change will only come in 2029, giving plenty of time to adjust.
However, if you’re considering how you might be affected by these changes then speaking to a professional financial planner to assess how best to proceed is essential.
Sources:
https://www.gov.uk/government/publications/budget-2025-document/budget-2025-html
https://www.reuters.com/business/finance/uk-raise-billions-by-cutting-salary-sacrifice-pensions-perk-obr-says-2025-11-26/
https://www.ft.com/content/e0729c11-768a-407f-a9d9-859e34a858be