Currently, NIC is not payable where salary is given up by an employee in exchange for the employer making pension contributions on their behalf. At the Autumn Budget 2025, the government announced that both the employer and the employee will be required to pay NIC on salary sacrificed pension contributions over £2,000 from April 2029. This is explained in more detail in an earlier article.  

The government estimates that approximately 3.3m individuals will need to pay NIC on salary-sacrificed pension contributions as a result of this measure. However, confusion over the meaning of ‘salary sacrifice’ has left many more individuals wondering if they will be impacted by the changes. 

What is ‘salary sacrifice’? 

The term ‘salary sacrifice’ is not defined in tax legislation. However, HMRC provides the following explanation in its guidance at EIM42750: 

“A salary sacrifice happens when an employee gives up the right to part of the cash remuneration due under his or her contract of employment. Usually, the sacrifice is made in return for the employer’s agreement to provide the employee with some form of non-cash benefit. The sacrifice is achieved by varying the employee’s terms and conditions of employment relating to remuneration.” 

Therefore, for an arrangement to be salary sacrifice, it must be the case that: 

• the employee has a contract with their employer that gives them a right to earnings; and
• the terms of that contract have been varied with the result that the employee has given up part of those earnings in exchange for receiving a non-cash benefit from their employer (eg, the employer making a contribution to the employee’s pension scheme).  

This is reflected in HMRC’s guidance, starting at EIM42760, on the conditions that must be met for a salary sacrifice arrangement to be successful for tax purposes. 

In 2017, legislation was introduced to withdraw the tax and NIC advantages of salary sacrifice (referred to as “optional remuneration arrangements”) from most benefits, including the provision of interest-free or low interest loans (s69A and 69B, Income Tax (Earnings and Pensions) Act 2003). Pension contributions were specifically excluded and are one of the few remaining benefits for which salary can still be sacrificed effectively. For the legislation to apply, it must be the case that “the employee gives up the right (or a future right) to receive an amount of earnings”. 

What is not impacted by the £2,000 cap? 

The £2,000 cap will not apply to pension contributions made outside of a salary sacrifice arrangement. To be clear, this includes: 

• pension contributions made by the employer out of its own funds and not in respect of earnings given up by the employee. There will continue to be no NIC due on employer pension contributions; and
• pension contributions made by the employee out of their net pay (ie, after tax and NIC has been deducted).  

The level of salary that can be sacrificed will not be impacted and can still exceed £2,000, subject to the pensions annual allowance and any limits imposed under scheme rules. This will still be effective for income tax purposes, including reducing an individual’s adjusted net income to continue to benefit from tax-free childcare, for example. However, there will be no NIC relief for either the employer or the employee on the salary sacrificed over £2,000. 

Owner-managed businesses  

Based on the information available at present, the cap will not apply to the typical owner-managed business scenario where there is no employment contract and the director/shareholder is paid a small salary, receives dividends and the company makes pension contributions on their behalf. This is because the director/shareholder does not have a right to receive earnings and so has not given up that right in exchange for the company making pension contributions on their behalf.  

Next steps 

The National Insurance Contributions (Employer pensions Contributions) Bill was published on 4 December 2025. This gives HM Treasury the power to make regulations to introduce the £2,000 cap on the NIC exemption for salary sacrificed pension contributions from April 2029. The government has said that it will consult on the design and operation of the cap. More will be known at that stage, including any additional anti-avoidance measures. 

Further information 

• The Tax Faculty’s Adelle Greenwood appeared on BBC Radio 4’s Moneybox programme to explain how the cap will apply.  
• Budget 25: Do the tax changes meet the tenets? | ICAEW