The HMRC salary sacrifice limit will change from 6 April 2029, introducing a £2,000 annual cap on pension contributions made via salary sacrifice that qualify for National Insurance relief.
Any amount above £2,000 will be subject to both employee and employer Class 1 National Insurance contributions, although income tax relief will remain unchanged. Around 3.3 million UK employees are expected to be affected.
Key takeaways:
- The first £2,000 of pension salary sacrifice remains NI free
- Contributions above £2,000 will attract employee and employer NICs
- 44 percent of current users are impacted, 56 percent remain unaffected
- Reform aims to control rising NIC relief costs
- Employers must prepare payroll systems before April 2029
This update represents a significant shift in how workplace pension salary sacrifice arrangements operate across the UK.
What Is the HMRC Salary Sacrifice Limit and Why Is It Changing?
The HMRC salary sacrifice limit refers to the new £2,000 annual threshold on pension contributions made through salary sacrifice arrangements that remain exempt from National Insurance contributions.
Salary sacrifice, also known as Optional Remuneration Arrangements for pensions, allows employees to exchange part of their gross salary for employer pension contributions, reducing Class 1 National Insurance liabilities for both parties.
Until now, there has been no monetary cap on the amount that could benefit from National Insurance savings, provided pay did not fall below the National Minimum Wage.
The government is changing this due to the rising cost of the relief. Forgone National Insurance linked to pension salary sacrifice increased from £2.8 billion in 2016 to 2017 to £5.8 billion in 2023 to 2024, with projections reaching £8 billion by 2030 to 2031.
The reform seeks to ensure fairness while maintaining broader pension tax incentives worth over £70 billion annually.
When Will the £2,000 HMRC Salary Sacrifice Limit Take Effect?
The HMRC salary sacrifice limit will take effect on 6 April 2029. From that date, salary or bonuses sacrificed above £2,000 per tax year for pension contributions will be treated as earnings for National Insurance purposes.
The legislative framework includes:
- Primary legislation amending the Social Security Contributions and Benefits Act 1992
- Secondary legislation detailing operational design following stakeholder engagement
- Payroll reporting updates to reflect new Class 1 NIC treatment
There is no immediate change for the 2025 to 2026 tax year, but employers are expected to begin preparation well before implementation. The government has confirmed that income tax relief remains untouched, and traditional employer pension contributions outside salary sacrifice remain NI exempt.
Between 2026 and 2029, businesses should review scheme design, consult payroll providers, and assess financial exposure. Early modelling is particularly important for firms with high earners or enhanced pension packages.
Although the reform does not apply until April 2029, the administrative and financial planning window is already open for UK employers.
How Will the £2,000 Cap on Salary Sacrifice Work in Practice?
From April 2029, the first £2,000 of pension contributions made via salary sacrifice each tax year will remain exempt from Class 1 National Insurance contributions. Any amount above that limit will be treated as earnings and subject to both primary and secondary Class 1 NICs.
In practical terms:
- Employees will pay National Insurance on sacrificed salary above £2,000
- Employers will also pay employer NICs on the excess
- Income tax relief on pension contributions remains unchanged
- Adjusted net income calculations remain unaffected
Currently, there is no financial ceiling on NI savings through pension salary sacrifice, provided minimum wage rules are respected. The reform introduces a clear boundary while retaining partial benefit for all participants.
Before vs After April 2029
| Feature | Before April 2029 | From April 2029 |
| NI exemption limit | No monetary cap | £2,000 annual cap |
| Employee NIC on excess | Not applicable | Payable on amount above £2,000 |
| Employer NIC on excess | Not applicable | Payable on amount above £2,000 |
| Income tax relief | Available | Unchanged |
| Minimum wage rule | Applies | Applies |
This means salary sacrifice remains available but becomes less advantageous for higher contribution levels. The structure ensures that typical contributors remain protected while limiting the scale of NI relief for larger pension exchanges.
Who Will Be Affected by the HMRC Salary Sacrifice Limit?
The HMRC salary sacrifice limit will impact both employers and employees who use pension salary sacrifice arrangements.
Based on the latest available data:
- 7.7 million employees currently use salary sacrifice for pensions
- 3.3 million sacrifice more than £2,000 annually
- 44 percent of users will be affected
- 56 percent, around 4.3 million employees, remain fully protected
Those most likely to be affected include:
- Higher earners making substantial pension contributions
- Employees making additional voluntary contributions
- Workers aged 31 to 50, who are overrepresented among users
- Male employees, who represent 59 percent of salary sacrifice participants
Employers operating these arrangements, estimated at 290,000 organisations, will also face new reporting and payment obligations. The measure does not remove salary sacrifice entirely. Instead, it limits the level of National Insurance relief available.
Most employees contributing typical auto enrolment amounts are unlikely to see any change, while those exceeding £2,000 annually will experience additional NIC liabilities on the excess portion only.
What Will the Financial Impact Be on Employees?
The financial impact on employees depends on how much they currently sacrifice above the new £2,000 threshold. While income tax relief remains intact, National Insurance savings on contributions exceeding the cap will be lost from April 2029.
Average Additional Employee NIC: £84 (2029–30)
According to government estimates, affected employees will pay an average of £84 in additional Class 1 primary National Insurance contributions in the first year of implementation. This figure applies to the 2029 to 2030 tax year and reflects average excess sacrifice levels.
Although £84 may appear modest, it represents a change in pension efficiency. The actual impact will vary depending on income level and contribution size.
Example Scenario (£5,000 contribution case)
Consider an employee sacrificing £5,000 per year into their workplace pension. Under current rules, the full £5,000 benefits from NI savings. From April 2029:
- The first £2,000 remains NI free
- The remaining £3,000 becomes subject to employee and employer NICs
This reduces the National Insurance advantage on £3,000 of contributions, increasing payroll deductions compared to previous years.
Long-term Compounding Effect on Pension Efficiency
Over time, reduced NI savings could influence retirement planning decisions. While pension contributions themselves remain invested and continue to benefit from income tax relief, the lost NI efficiency reduces the overall tax advantage of larger salary sacrifice amounts.
For consistent higher contributors, this could accumulate over several years, particularly if contribution levels remain above the threshold.
Behavioural Response: Reducing Salary Sacrifice Amounts
Some individuals may adjust behaviour by:
- Reducing salary sacrifice to £2,000
- Switching to traditional employee contributions
- Maintaining contributions despite higher NICs
The government expects no significant change in how individuals interact with HMRC directly, as payroll processes remain employer led. However, financial planning conversations are likely to increase as 2029 approaches.
What Does the HMRC Salary Sacrifice Limit Mean for Employers?
Employers operating pension salary sacrifice schemes will face additional compliance and financial responsibilities from April 2029. Approximately 290,000 employers are expected to be affected.
Businesses will need to:
- Calculate excess contributions above £2,000
- Pay secondary Class 1 NICs on those amounts
- Update payroll software and reporting processes
- Train HR and payroll teams
The estimated one off administrative cost is £20 million across businesses, with ongoing annual costs of around £30 million. Despite these changes, reporting methods are expected to align with existing HMRC processes.
For employers with enhanced pension offerings or higher earning workforces, the financial modelling may be more complex. Clear communication with employees will be essential to manage expectations and explain changes in take home pay calculations from 2029 onwards.
Why Is the Government Introducing the £2,000 Limit?
The government states that it continues to support pension saving through substantial tax reliefs exceeding £70 billion annually. However, salary sacrifice has allowed some higher earners to receive disproportionately large National Insurance benefits compared to those without access to such schemes.
The cost of the relief has risen sharply over recent years, increasing from £2.8 billion in 2016 to 2017 to £5.8 billion in 2023 to 2024. Without reform, projections suggest this could approach £8 billion by 2030 to 2031.
The £2,000 contribution limit aims to:
- Protect lower and typical earners
- Limit excessive NI relief for higher contributions
- Maintain fairness between employees
- Ensure fiscal sustainability
The measure retains partial benefit for all users while narrowing the scale of National Insurance advantages available at higher contribution levels.
How Does This Compare to Previous Salary Sacrifice Reforms?
2017 OpRA Reforms
In April 2017, the government reformed Optional Remuneration Arrangements, removing most tax and National Insurance advantages from salary sacrifice schemes.
Removal of Tax Advantages for Cars, Gym Memberships Etc
Benefits such as company cars, gym memberships, and other non pension perks largely lost their favourable tax treatment under those reforms.
Why Pensions Were Previously Protected?
Pension contributions were excluded from the 2017 changes because of the government’s strong policy support for retirement saving.
Shift in Government Stance
The introduction of the HMRC salary sacrifice limit marks a partial shift. Pensions remain supported, but the scale of NI exemption is now capped, reflecting concerns over cost growth and fairness.
What Should UK Employers and Pension Savers Do Before 2029?
With implementation set for April 2029, there is a clear planning window. Proactive preparation can reduce disruption.
Recommended actions include:
- Modelling the financial impact on high contributors
- Reviewing pension scheme structures
- Consulting payroll providers about system updates
- Communicating anticipated changes to employees
- Considering contribution strategies before the cap applies
Employees may wish to:
- Assess annual sacrifice levels
- Seek financial advice if contributing above £2,000
- Evaluate long term retirement goals
Although the reform does not take immediate effect, delaying preparation could increase administrative pressure closer to 2029. Early engagement ensures smoother transition and clearer understanding of future National Insurance liabilities.
Will the HMRC Salary Sacrifice Limit Affect Adjusted Net Income or Tax Free Childcare?
The HMRC salary sacrifice limit does not alter how adjusted net income is calculated. Salary sacrifice will continue to reduce taxable pay, which can influence eligibility for benefits such as Tax Free Childcare and the Personal Allowance taper.
Even after April 2029, employees can still use pension contributions, whether through salary sacrifice or traditional methods, to reduce adjusted net income. The only change concerns National Insurance treatment above £2,000.
Therefore, while National Insurance costs may increase for higher contributors, the broader tax planning role of pension contributions remains intact. Means tested benefits and income thresholds are unaffected by this reform.
Economic and Exchequer Impact of the Reform (2025–2031)
The Exchequer impact reflects a significant revenue shift beginning in 2029 to 2030. Early years show limited change, but substantial gains occur once the reform is implemented.
Revenue Projections
| Tax Year | Exchequer Impact (£ million) |
| 2025 to 2026 | 0 |
| 2026 to 2027 | -40 |
| 2027 to 2028 | -55 |
| 2028 to 2029 | -75 |
| 2029 to 2030 | +4,845 |
| 2030 to 2031 | +2,585 |
The measure is not expected to have significant macroeconomic impact. HMRC will incur IT implementation costs estimated at £1.9 million, alongside updates to guidance and communication channels.
Administrative burdens for businesses include:
- One off cost of £20 million
- Ongoing annual cost of £30 million
Monitoring and evaluation will follow implementation once data becomes available. The reform is designed to balance revenue sustainability with continued support for pension saving across the UK workforce.
Conclusion
The HMRC salary sacrifice limit introduces a targeted reform rather than a complete withdrawal of pension incentives. From April 2029, National Insurance relief will apply only to the first £2,000 of pension salary sacrifice contributions, affecting around 3.3 million employees and thousands of employers.
While typical contributors remain protected, higher earners and organisations with enhanced pension structures must prepare for additional NIC liabilities. Income tax relief and adjusted net income benefits remain unchanged, preserving core pension advantages.
For UK businesses and pension savers, the message is clear. Planning ahead of 2029 is essential to manage compliance, understand financial impact, and maintain effective retirement saving strategies within the new National Insurance framework.
FAQs
Will the £2,000 cap reduce income tax relief on pensions?
No, income tax relief on pension contributions remains unchanged. The reform only affects National Insurance treatment above £2,000.
Can employers stop offering salary sacrifice schemes?
Employers can review their schemes, but salary sacrifice for pensions remains permitted. The change simply limits the level of NI exemption.
Does the cap apply per employment or per individual?
The limit applies per individual per tax year. Operational details will be clarified in secondary legislation.
Will auto enrolment minimum contributions be affected?
Most auto enrolment contributions fall below £2,000 annually. Therefore, typical minimum contributions are unlikely to be impacted.
Can employees switch to non salary sacrifice contributions to avoid NICs?
Traditional employee contributions remain available, but they do not provide the same employer NI savings. National Insurance treatment differs between arrangements.
How will payroll software need to change?
Payroll systems must identify contributions above £2,000 and calculate Class 1 NICs accordingly. Employers are expected to update systems before April 2029.
Are directors and company owners treated differently under the new rules?
The reform applies to all employees participating in pension salary sacrifice schemes. Directors are not exempt from the £2,000 cap.
