From 6 April 2029, salary-sacrificed pension contributions above £2,000 per year will no longer be exempt from National Insurance (NI).
Although the cap takes effect in 2029, its implications for benefit design and cost planning are already clear. And with NI relief on pension salary sacrifice still fully available today, employees and employers should maximise the opportunity while they can.
At the same time, acting now will help employers to avoid a sharp rise in employment costs once the cap takes effect.
What’s changing in April 2029?
From April 2029, salary-sacrificed pension will only attract NI relief up to £2,000 per year. Above that threshold, standard NI rates will apply:
15% for employers;
8% for employees on income below £50,270
2% on income greater than £50,270
With income tax thresholds frozen following the 2025 Autumn Budget, more employees are set to drift into higher bands – magnifying the effect of the cap.
The change will have a material impact on both employees and employers. Below, we’ve modelled the annual NI cost for an 8% pension contribution (split 4% employee and 4% employer):
For employees earning £60,000, an additional cost of £8 to employees. The additional cost to employers is £60 per employee. For employees earning £100,000, an additional cost of £40. The additional cost to employers is £300 per employee. |
For many employers, this represents a significant rise in payroll costs – especially where pension contributions already exceed the £2,000 threshold across large workforces, typically a feature already for those with higher earners and/or more generous contribution structures. This underlines the scale of the challenge and the need for early planning.
What isn’t changing?
Not all salary sacrifice mechanisms are changing, however:
Electric vehicle (EV) salary sacrifice – continues to enjoy low Benefit-in-Kind (BiK) rates (3% in 2025-26, rising to 9% by 2029-30), well below comparable petrol/diesel cars.
Cycle-to-work schemes – also unaffected, remaining an accessible active, tax efficient option for employees. A previous £1,000 cap was eased in June 2019.
These will remain valuable tools for managing employer NI exposure once the pension cap arrives.
How to maximise salary sacrifice before 2029
With pension salary sacrifice still unrestricted, employees and employers should use the next few years to lock-in available savings:
Reduce income tax and NI for employees and reduce NI for employers.
Manage frozen thresholds – helping employees to stay within key tax bands or retain important allowances.
Use employer NI savings to reinvest in richer benefits packages.
Optimising these efficiencies today can deliver meaningful cost savings, helping employers to strengthen their benefits packages while offsetting future cost pressures.
Don’t overlook NI savings on taxable flexible benefits
Although most flexible benefits (e.g. Private Medical Insurance, Travel Insurance, Critical Illness Cover) are subject to income tax as Benefits-in-Kind (BiKs), the salary sacrifice mechanism still reduces NI-applicable pay. This is an often-overlooked advantage:
Employees avoid NI (8% or 2%, depending on income) on the sacrificed amount, even when the benefit is taxable
Employers save 15% NI on the same amount
These savings can materially lower net costs for basic-rate taxpayers and can help employers to fund or enhance their benefits schemes.
Case study: NI savings from Private Medical Insurance Employee earns £35,000 and selects PMI costing £600/year via their flexible benefits platform. Without salary sacrifice: £600 paid from net salary = No NI saving. With salary sacrifice: £600 deducted from gross = Employee NI saving of £48/year (8%) + employer NI saving of £90/year (15%). |
For employees juggling tight budgets, or for employers looking to stretch their benefit spend, these extra savings can make all the difference but are rarely communicated.
By highlighting both the tax efficient and NI efficient elements of flexible benefits, employers can deliver greater value from their existing benefit programmes – without relying solely on pension sacrifice.
Prepare now for higher costs in 2029
Although the cap won’t hit until 2029, the financial impact is already a live issue – and if employers wait to act, they could risk sleepwalking into a significant rise in NI costs.
Now is the time to take practical steps to understand the exposure and plan accordingly:
Model NI exposure – quantify the impact for different employee groups, especially high earners or those with enhanced employer contributions.
Audit current salary sacrifice arrangements – including pensions, EVs, cycle-to-work, and flexible benefits, to identify where NI efficiency remains available.
Run scenario modelling – factoring in frozen thresholds and salary growth to understand who may cross the £2,000 limit.
Review benefit design – exploring structures that mitigate NI pressures while maintaining competitiveness.
Communicate clearly – helping employees understand both the upcoming cap and the current opportunities to maximise savings.
Plan NI recycling strategies – using employer NI savings to fund enhanced pension contributions or broader benefits.
Engage HR, payroll, and benefits providers – ensuring systems can accommodate the new rules in 2029.
Acting now will help employers to manage rising NI costs and ensure they can continue offering competitive benefits programmes – both today, and once the new cap is in force.
For more information, reach out to a member of our team.
