Pensions salary sacrifice cap of £2,000 will be introduced 6 April 2029
The National Insurance savings on pension contributions via salary sacrifice will be capped at £2,000 per year from 6 April 2029. The relevant legislation is the National Insurance Contributions (Employer Pensions Contributions) Act 2026 which became law on 29 April 2026 but the majority of the detail will be set out in forthcoming regulations.
Salary sacrifice, also known as salary exchange, involves an employee giving up part of their gross salary in return for the employer increasing its pension contributions by a corresponding amount into the employee’s pension. Salary sacrifice effectively turns employee contributions into employer contributions. As salary is lower, the net effect is the employee and employer pay less National Insurance.
There is no limit on the amount an employee can pay into their pension under salary sacrifice provided the post-sacrifice salary remains above the minimum wage.
From April 2029, the amount an employee can contribute to a workplace pension via salary sacrifice is capped at £2,000 a year. Employees can still pay more than this into their pension, but any contributions above this level are subject to employer and employee National Insurance.
Employers need to report the total amount sacrificed through their existing payroll software. HMRC will engage with stakeholders on this and publish further guidance on this.
All employer pension contributions will continue to be free of National Insurance. Employees who choose to sacrifice salary to receive Tax Free Childcare or Child Benefit can keep doing so.
Why?
The Government says that most working people are unaffected by the cap as they contribute less than £2,000 per annum to their pension. The Government says the cost of relief through salary sacrifice relates disproportionately to pension contributions from those on higher incomes. It says the cap makes the system fairer and more sustainable and means that any salary sacrificed above the £2,000 cap is treated the same for tax purposes as other pension scheme arrangements.
The issue flagged by critics however is that the cap is penalising the people who are trying their best through increased contributions and perhaps sacrifice of bonuses to save enough to support themselves in retirement (it’s generally accepted that the legislative minimum level of contributions will be inadequate for most people).
What’s next?
The change is expected to have a chilling effect on pensions saving.
The change limits the benefit of salary sacrifice arrangements. It means employers, due to increased costs (employer National Insurance Contributions are 15% on earnings above £5,000 in the 2026/27 tax year), may reconsider bonuses and pay-rises for employees and might even withdraw the salary sacrifice scheme altogether, subject to the terms of the scheme, due to the administrative inconvenience.
Employees may wish to front load contributions (subject to pensions tax efficiency) before the change comes into effect in 2029.
If you need legal advice on pensions, see how our specialist pensions lawyers can help here. Our dedicated team provides expert advice to all industry sectors in respect of private and public sector pension schemes, regulatory compliance, pension disputes and life assurance.
Share:
If you need legal advice on pensions issues
Speak to a member of our Pensions team
Arrange a callHow can we help?
To get in touch with one of our legal experts please fill in your details.
Enjoy That? You Might Like These:
articles
articles
events