Will the Government make a change to pension salary sacrifice? We generally don’t know, and after the strong income tax rate rise rumours being dispelled in today’s* press, it’s hard to predict what will happen in this budget. (*14/11/25)
Let’s assume the Government did make a change (see rumours below), one rumour wouldn’t spell the end to pension salary sacrifice, but it would have a major impact and reduce the savings that both employees and employers make (or could make) from these arrangements. The other rumour would end all benefit of having the arrangement in place.
For those of you unfamiliar with the concept of pension salary sacrifice, here’s an earlier article.
For those familiar with the topic, please read on to understand the potential implications.
What do we know?
It has been widely reported that the Government is considering introducing a cap on pension salary sacrifice, which would limit the amount of National Insurance Contribution (“NIC”) relief that both employees and employers can obtain.
The initial rumour is that changes will be implemented so that employees can only obtain NIC relief on pension contributions up to £2,000 per tax year. A similar provision would also be introduced into legislation, which would restrict the employers’ NIC relief that employers obtain on these arrangements as well.
As of 14th November, another rumour is circulating that the Government could abolish pension salary sacrifice entirely.
The rest of this article deals with the £2,000 rumour.
Why £2,000 per tax year?
This is “hypothetical scenario 3” in a government research paper commissioned and published earlier this year.
If it did happen, it would be considered unlikely to commence on budget day, and the most likely scenario is that it would commence from April 6, 2026, or even a later tax year. When the Government introduced changes to other salary sacrifice arrangements previously via Optional remuneration arrangements, there were grandfathering provisions introduced to allow employers time to make appropriate changes. Similar provisions would likely be introduced if the government were to make a change to pension salary sacrifice.
Who could be impacted by this change if relief was capped at £2,000?
In short, both employers and employees who have either a pension salary sacrifice in place or are considering introducing such an arrangement in the future.
A report commissioned by the Society of Pension Professionals estimates that 1/3 of private sector employees and 10% of public sector employees participate in some form of pension salary sacrifice.
If you have a pension salary sacrifice in place, what could this mean if relief was capped at £2,000?
It depends on your definition of pensionable pay.
For example, if your pensionable pay definition is based on qualifying earnings thresholds, then an individual’s pension contribution is capped based on the lower and upper limit. Assuming the employee contribution is 5%, then under this pensionable pay definitio,n it would impact employees with earnings greater than £46,240.
For other pensionable pay definitions, the salary level would most likely be lower than this. For example, if the pensionable pay definition is all earnings and assuming 5% employee contributions, then it would impact employees with earnings greater than £40,000.
Where an employee is impacted, this will mean:
- They pay national insurance contributions on every £1 of contribution above £2,000 per tax year. Assuming employee NIC rates remain the same it would either be an 8% or 2% charge on these contributions for the employee.
- An employer will be charged 15% on every contribution the employee makes above £2,000.
To be clear, this is just where a pension salary sacrifice is operated. So, we are saying that where the employee sacrifices an amount in exchange for an employer pension contribution, that sacrifice will be operated by the employee and employer NIC.
Why? Because if pension salary sacrifice is not operated, then the employee does NOT obtain any NIC relief, just income tax relief. So, there will still be some benefit for both the employee and employer of running a pension salary sacrifice; we’re just saying they wouldn’t be as beneficial as they are now.
How the government will monitor compliance with such a change will be interesting. Clearly, payroll real-time information submissions will easily highlight to them if someone hasn’t operated NIC, but will they enact more far-reaching legislation to prevent contractual changes which wouldn’t show a change on the payslip? If they don’t, then how would they look at such changes? Would it be considered a perceived abuse of the intention of the legislation? I guess we will have to wait and see.
What is clear, based on current rumours, is that it will be a nightmare adjusting payroll software to account for such a change, as the £2,000 doesn’t align with pension auto-enrollment legislation.
If you don’t have a pension salary sacrifice in place, is it still worthwhile introducing?
It depends on whether the budget rumours are true and which one!
As highlighted in the previous section, if changes are made to the budget and the relief is capped at £2,000, there is still an opportunity for both the business and employees to save money if the arrangement is introduced.
Every employee can still make a saving. The employer will still make a saving; it will just be capped.
What could the savings look like going forward, assuming pension salary sacrifice is not abolished?
Let’s assume the Government caps the relief at £2000 employee contributions, you have a workforce with an average salary of £30,000, and you operate a standard auto-enrolment scheme with 5% employee contributions and a qualifying earnings pensionable pay definition.
| Number of employees | Potential employer savings if pension salary sacrifice implemented (amounts rounded down to nearest £500) |
| 25 | £4,000 per year |
| 50 | £8,500 per year |
| 100 | £17,500 per year |
| 150 | £26,500 per year |
| 200 | £35,500 per year |
What would the savings be for an employee applying the same assumptions?
| Salary | Estimated annual savings for the employee |
| £30,000 | £95 per year |
| £35,000 | £115 per year |
| £40,000 | £135 per year |
| £46,240 | £160 per year |
| Above £46,240 | £160 per year – assuming the government caps relief to £2,000 employee contributions |
Note- regardless of pensionable pay definition, if the rumoured change takes effect, the maximum an employee could save is £160 per year.
What happens next?
Currently, we don’t know what the Government will decide. Rumours will continue to circulate, and the details may change right up until Budget Day. But whatever the outcome, whether the changes are significant, modest, or don’t materialise at all, we’ll be ready.
As soon as the position becomes clear, we’ll cut through the noise, explain what it means in practice, and support anyone who needs guidance.
Whatever comes our way, we’ll be here to help you navigate it.
