The new pension and salary sacrifice changes, announced in the Autumn 2025 Budget, represent a shift in how HMRC expects employers and director-owners to approach remuneration planning.
While no new limits have been introduced on how much can be contributed to a pension, the new framework places far greater emphasis on compliance, documentation, and National Insurance treatment. Equally importantly, these changes will not take effect until 6 April 2029, giving businesses time to review their systems and remuneration structures.
In this article, we explain what is changing, who will be affected, how the new rules will work in practice, and what steps you should consider taking now.
New Pension and Salary Sacrifice Changes – Overview
Despite widespread speculation ahead of the Autumn 2025 Budget, the government chose not to introduce a cap on pension salary sacrifice contributions. Consequently, this means the Annual Allowance, currently £60,000 for most individuals, remains the main limit on tax-relieved pension savings
Instead, the New Pension and Salary Sacrifice Changes focus on tightening the rules around:
What Is Salary Sacrifice?
A Salary Sacrifice arrangement is where an employee agrees to surrender part of their gross salary in return for a non-cash benefit. In most cases today, this benefit is an employer pension contribution, as HMRC has largely restricted salary sacrifice for other types of benefits.
This method is widely used because it reduces both income tax and employee National Insurance contributions (NICs). Plus employers also benefit from reduced NICs. Additionally, the sacrificed salary is not treated as earnings for tax or NIC purposes. Furthermore, the pension contribution is usually deductible for corporation tax.
Salary sacrifice is popular because:
However, HMRC require clear evidence that these arrangements are properly implemented and not used artificially. As a result, we expect increased scrutiny once the New Pension and Salary Sacrifice Changes take effect, particularly where:
We discuss directors in more detail below.
How the New Salary Sacrifice Rules Work from April 2029
From 6 April 2029, a new limit will apply to the National Insurance savings generated through pension salary sacrifice.
The key change
Employees will be limited to £2,000 per tax year in employee National Insurance savings arising from salary sacrifice pension arrangements.
This is not:
Once the £2,000 NIC saving limit is reached, any further sacrificed salary will become subject to Class 1 National Insurance for both the employee and the employer.
An example Employee on £60,000 salary
Let’s take John, who earns £60,000 a year and chooses to sacrifice £5,000 of his salary into his workplace pension.
Before April 2029
Under the current rules:
From April 2029
Under the new rules:
This reduces the overall efficiency of larger salary sacrifice arrangements. However, it does not remove their usefulness entirely.
Who is likely to be affected?
These changes will not impact everyone equally. Those most likely to notice a difference include:
However, employees making modest contributions are unlikely to see any material change.
What about Director-Owners?
The £2,000 cap is aimed specifically at salary sacrifice arrangements where contractual earnings are given up in exchange for employer pension contributions.
In many owner-managed companies:
In these situations, there may be no salary sacrifice at all, meaning the new NIC cap may not apply.
Directors are office holders rather than employees, and HMRC often views their remuneration differently. However, HMRC has not yet issued detailed guidance on how the New Pension and Salary Sacrifice Changes will apply to director-owners.
We expect HMRC to pay closer attention to:
Consequently, careful structuring and documentation remain essential.
What action should you take now?
Although the new rules do not take effect until 2029, investing in pensions is a long-term strategy. Therefore you should consider:
Summary
The New Pension and Salary Sacrifice Changes do not introduce contribution caps. Although, they do significantly change how National Insurance savings will be treated from April 2029.
For most employees making regular pension contributions, the impact will be limited. However, higher earners and businesses using salary sacrifice extensively will need to review their approach
Additionally, director-owners should continue to ensure pension contributions reflect commercial reality and are properly structured, particularly as HMRC scrutiny is likely to increase.
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