For 2028/29 and earlier tax years, salary sacrificed in return for the employer making pension contributions is exempt from NIC. However, from 6 April 2029, the exemption will be capped at £2,000 per year.

Where the amount of salary sacrificed exceeds £2,000, the excess amount will give rise to a NIC liability:

• for the employee, at their NIC marginal rate. Employees currently pay NIC at the rate of 8% on earnings between the primary threshold (£12,570 for 2026/27) and the upper earnings limit (£50,270), and at 2% on earnings above the upper earnings limit; and
• for the employer, at the rate of 15%.

This change is expected to raise additional NIC for the government of £4.7 billion in 2029/30.

No changes have been made to:

• the income tax exemption for employees on salary sacrificed pension contributions; 
• the NIC exemption for pension contributions made by employers outside of a salary sacrifice arrangement; or
• the income tax and NIC treatment of other tax-efficient benefits made under salary sacrifice agreements (see below).

HMRC published research on the introduction of a £2,000 cap, and other options, in May 2025. Some of the employers who took part in the survey felt that the proposal was complicated and could place an added administrative burden on them.  In some arrangements, the employer may also share some or all of the employer NIC savings with the employee by using this to increase the employer pension contributions further. In such cases there could be a significant impact on the agreement in place.

ICAEW’s view

Adelle Greenwood, Technical Manager – Employment Taxes and NIC, ICAEW, said: “The government’s announcement that the NIC base will be broadened to include salary sacrifice pension contributions above a new cap will disappoint employers, particularly as it comes so soon after the increase in the rate of employers’ NIC to 15%.

“Not only does it add to employers’ NIC bills, but it also makes the tax system more complicated for employers to administer and for employees to understand. For example, some employees use salary sacrificed pension contributions to manage exposure to the high income child benefit charge, or retain their personal allowance. They will need to consider how the changes impact their wider tax and NIC position. Also, lower paid employees may question the fairness of the measure as they face a NIC charge at 8%, compared to 2% for higher paid employees.”

This cap will make it more complex for employers to offer a simple and flexible solution for retirement savings. Changes to salary sacrifice are likely to require contractual amendments, so the lead time to April 2029 will allow employers time to review their approach and how this change will impact their overall benefit offerings. However, the increased national minimum wage from April 2026, announced this week, may also mean that some employee populations are phased out of salary sacrifice schemes earlier, as an employee cannot sacrifice their salary below minimum wage.”

At a time when there is a pensions commission considering the adequacy of pension saving, this demonstrates a lack of joined-up thinking from the government.”

What is salary sacrifice?

An employee may enter into a salary sacrifice agreement with their employer. Under the arrangement, the employee may agree to give up part of their gross pay in return for a non-cash benefit from their employer. This can reduce the employee’s income tax liability, and save NIC for both the employee and the employer, depending on the nature of the non-cash benefit. 

The tax-efficient benefits that may currently be offered under a salary sacrifice arrangement are:

• payments into pension schemes;
• employer-provided pensions advice;
• access to workplace nurseries;
• childcare vouchers and directly contracted employer-provided childcare that started on or before 4 October 2018; 
• the use of bicycles and cycling safety equipment (including cycle to work); and
• ultra-low emission cars (75g/km or less), including electric vehicles.

The rules for salary sacrifice can be complicated to apply. For example, a salary sacrifice agreement cannot reduce the employee’s earnings below the national minimum wage rates. There are also rules to ensure employees cannot exchange their salary for a non-cash benefit that has a lower or nil taxable value.

Further information

• Changes to salary sacrifice for pensions from April 2029 - GOV.UK
• Government revives landmark Pensions Commission to confront retirement crisis that risks tomorrow’s pensioners being poorer than today’s - GOV.UK