The Autumn Budget 2025 was one of the most keenly anticipated in recent memory. While media speculation of a complete overhaul of the pensions and savings landscape proved unfounded, the Chancellor did deliver a less-publicised, yet significant, reform that will affect how many of us save for retirement.
While key pension rules, such as the Lifetime Allowance, tax-free cash, and Annual Allowance remain untouched, a subtle but important change has been made to one of the most effective ways to boost your pension: salary sacrifice.
This reform, coming into effect from the 2029/30 tax year, will cap the National Insurance (NI) savings benefit of the scheme, requiring those contributing into their pensions in this way to adjust their financial planning.
What is salary sacrifice and why is it so valuable?
Salary sacrifice is a common and highly efficient UK payroll arrangement. An employee agrees to a reduction in their gross (pre-tax) salary in exchange for a non-cash benefit, most typically an employer contribution directly into their pension.
The true benefit of salary sacrifice lies in its tax efficiency:
- Income Tax Savings: Since the contribution is paid by the employer from your gross pay, you automatically avoid paying Income Tax on the sacrificed amount.
- National Insurance (NI) Savings: Because your gross salary is reduced, both you (the employee) and your employer pay less in National Insurance Contributions (NICs).
- The Employer Bonus: Many employers pass on their NI savings (currently a flat 15% on earnings above a threshold) to the employee’s pension pot, effectively turning £100 of sacrificed salary into a larger contribution (e.g., £115) for no extra cost to the employee.
Beyond the immediate tax savings, salary sacrifice is a vital tool for strategic income management: it can reduce your ‘adjusted income’ below key tax thresholds, helping you retain your full Personal Allowance (by staying below £100,000) or avoid the Child Benefit High Income Charge taper for earnings over £50,000.
Understanding the change: the £2,000 NI Cap
The Autumn 2025 Budget introduced a cap on the NI savings benefit of salary sacrifice.
The new rule dictates that only the first £2,000 of annual contributions made via salary sacrifice will qualify for National Insurance savings for both the employee and the employer.
Any contributions above this £2,000 limit will still benefit from Income Tax relief (which remains unaffected), but the valuable NI savings, and the potential employer NI bonus, will largely disappear on the excess amount.
This means that while the core tax-efficiency of salary sacrifice remains intact, the significant extra boost high earners currently enjoy will be curtailed from 2029/30.
Current National Insurance rates for employees and employers
| NIC Thresholds & Rates (2025/26) | Annual Amount (£) | NIC Rate |
| Employee Primary Threshold (PT) | Up to £12,570 | 0% |
| Employee Main Rate Band (PT to UEL) | Between £12,571 and £50,270 | 8% |
| Employee Upper Earnings Limit (UEL) | Above £50,270 | 2% |
| Employer Secondary Threshold (ST) | Up to £5,000 | 0% |
| Employer Main Rate | Above £5,000 | 15% |
Impact: before and after the 2029/30 cap
To illustrate the effect of the new cap, let’s look at three common examples:
Scenario 1: basic-rate saver (£35,000 salary, £1,200 Pension):
This scenario demonstrates that small, regular contributions remain fully beneficial as the total sacrificed amount is below the £2,000 cap. The NI rates used are 8% (Employee) and 15% (Employer).
| Detail | Pre-2029 (Full Benefit) | Post-2029 (£2,000 Cap) | Difference |
| Annual Sacrifice | £1,200 | £1,200 | £0 |
| Employee NI Saving (8% of £1,200) | £96.00 | £96.00 | £0 |
| Employer NI Saving (15% of £1,200) | £180.00 | £180.00 | £0 |
| Pension Contribution (Sacrifice + Employer Bonus) | £1,200 + £180.00 = £1,380.00 | £1,200 + £180.00 = £1,380.00 | £0 |
| Net Cost to Employee (£1,200 – Employee NI Saving) | £1,104.00 | £1,104.00 | £0 |
Conclusion: For contributions of £2,000 per year or less, there is no change in the NI efficiency or the total contribution received.
Scenario 2: Higher-rate saver (£60,000 salary, sacrificing £5,000 into Pension):
This demonstrates the loss of the NI benefit on the £3,000 of sacrifice that falls above the £2,000 cap.
| Detail | Calculation Breakdown | Pre-2029 (Full Benefit) | Post-2029 (£2,000 Cap) | Difference |
| Annual Sacrifice | – | £5,000 | £5,000 | £0 |
| Employee NI Rate | All earnings are within the 8% and 2% bands (average rate approx. 6.42% for £5k). For NI saving, we use the average rate of 8% on the marginal income band for the bulk of the sacrifice. | £5,000 x ~8% = £400.00 | £2,000 x 8% = £160.00 | -£240.00 |
| Employer NI Saving | 15% on the amount sacrificed | £5,000 x 15% = £750.00 | Capped at £2,000 x 15% = £300.00 | -£450.00 |
| Total Pension Contribution (Sacrifice + Employer Bonus) | £5,000 + Employer NI Saving | £5,000 + £750.00 = £5,750.00 | £5,000 + £300.00 = £5,300.00 | -£450.00 |
| Net Cost to Employee (Excl. Tax Relief, which is retained) | £5,000 – Employee NI Saving | £4,600.00 | £4,840.00 | +£240.00 |
Conclusion: The total pension contribution drops by £450.00 because the employer is no longer incentivised to pass on the full £750.00 NI saving. The employee’s net cost rises by £240.00 due to the lost NI saving.
Scenario 3: Strategic high earner (£115,000 salary, sacrificing £15,000 into Pension):
This strategy is primarily used to reduce Adjusted Net Income below the £100,000 threshold to protect the Personal Allowance (saving 60% marginal tax/NI rate on the withdrawn allowance). The Income Tax benefit is unaffected, but the NI savings are almost eliminated.
| Detail | Calculation Breakdown | Pre-2029 (Full Benefit) | Post-2029 (£2,000 Cap) | Difference |
| Annual Sacrifice | – | £15,000 | £15,000 | £0 |
| Income Tax Relief (40% Higher Rate) | £15,000 x 40% | £6,000.00 | £6,000.00 | £0 |
| Employee NI Saving (2% Rate) | All income above UEL (£50,270) is taxed at 2%. | £15,000 x 2% = £300.00 | Capped at £2,000 x 2% = £40.00 | -£260.00 |
| Employer NI Saving/Bonus | 15% on the amount sacrificed | £15,000 x 15% = £2,250.00 | Capped at £2,000 x 15% = £300.00 | -£1,950.00 |
| Total Pension Contribution (Sacrifice + Employer Bonus) | £15,000 + Employer NI Saving | £17,250.00 | £15,300.00 | -£1,950.00 |
| Net Cost to Employee (Pre-Tax + NI Cost) | £15,000 – Income Tax Relief – Employee NI Saving | £15,000 – £6,000 – £300 = £8,700.00 | £15,000 – £6,000 – £40 = £8,960.00 | +£260.00 |
Conclusion: The primary goal of protecting the Personal Allowance remains intact. However, the NI-related bonus is reduced from £2,250.00 to just £300.00, representing a £1,950.00 loss in the total pension contribution. The employee pays £260.00 more net for the contribution.
Sticking to the plan: why pensions still matter
While the reduction in NI savings marks a loss of generosity, it is crucial for savers to retain perspective on the fundamentals of retirement planning.
The 2029/30 changes only cap the additional benefit that salary sacrifice provides through National Insurance exemptions; they do not diminish the core tax advantages that make pensions one of the most powerful savings vehicles available.
Income Tax relief is fully maintained
The most valuable tax benefit remains entirely untouched:
- Income Tax exemption: Pension contributions, whether via salary sacrifice or a personal payment, are still exempt from Income Tax at your highest marginal rate (20%, 40%, or 45%). This is the engine of pension tax efficiency.
- Strategic advantage: The ability to use salary sacrifice to lower your adjusted net income and protect key thresholds, such as the £100,000 Personal Allowance taper, remains fully effective. This strategic benefit alone often outweighs the lost NI saving for high earners.
Crucially, while the loss of the NI bonus means your employer contributes slightly less to your pot (as seen in the tables), it does not generally cost the employee any more to make the core contribution. Your initial sacrifice amount is the same, and your tax relief is maintained; you simply lose the NI saving that previously boosted your overall return.
Pensions as a whole remain highly attractive
Beyond salary sacrifice, the wider UK pension landscape remains favourable:
- High annual allowance: The ability to contribute up to £60,000 per year (or 100% of your earnings) tax-efficiently remains intact, along with the ability to carry forward unused allowance from the previous three years.
- Self-employed savers unaffected: For the self-employed, who typically use personal pensions, the method of claiming tax relief (via Relief at Source or Self-Assessment) is completely unchanged. Their contributions are unaffected by the salary sacrifice cap.
Taking control: the private pension benefit
With the marginal benefit of workplace salary sacrifice schemes reduced, some savers may now look to optimise their savings in other ways. This is where personal pensions, like a Self-Invested Personal Pension (SIPP), become highly relevant:
- Investment control: A SIPP gives you full control over your investment strategy, allowing you to choose specific funds, shares, or other assets (or even a managed portfolio) that align with your risk tolerance and financial goals.
- Consolidation: A SIPP is also an excellent vehicle for consolidating older workplace pensions, giving you a clear, single view of your retirement wealth.
- Flexibility: You could also contribute to a SIPP alongside your workplace pension, providing a flexible way to use your remaining Annual Allowance once you have maximised your employer match.
Conclusion
The Autumn 2025 Budget decision to cap the National Insurance benefits of salary sacrifice from 2029/30 is undoubtedly a blow to the scheme’s efficiency, particularly for high earners making large contributions. It reflects the government’s move to make the system fairer and recover some revenue from generous tax reliefs.
However, the noise around this change should not obscure the central truth: pensions remain a fundamentally tax-efficient way to save for retirement.
For basic-rate taxpayers and those with smaller contributions, the impact is minimal. For higher earners, the strategic use of salary sacrifice to manage income thresholds and the retention of valuable Income Tax relief mean the scheme is still highly beneficial, it is just less generous than before.
The key takeaway for every Moneyfarm client is not to abandon the plan, but to review and adapt. By understanding the limits of the new landscape and potentially rebalancing some larger contributions towards a private pension for greater control, you can ensure your retirement strategy continues to be as robust and tax-efficient as possible, even in a changing environment.
Moneyfarm does not provide tax advice. This content offers general information on the Autumn 2025 Budget changes to salary sacrifice and is not personal financial or tax advice. UK tax laws are subject to change, and the tax treatment of pensions depends on individual circumstances. The value of investments can fall as well as rise. Before making any decisions about your pension or savings strategy, you must seek advice from a qualified and regulated financial adviser.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
