Salary sacrifice pension contributions NICs exemption capped from April 2029

The government will cap the National Insurance contributions (NICs) exemption for pension contributions made through salary sacrifice at £2,000 per employee per year from 6 April 2029, a measure announced in the Autumn Budget on 26 November 2025¹. The Government Actuary's Department set out the change in a report published on 13 January 2026 on the draft Social Security Benefits Up-rating Order 2026 and the draft Social Security (Contributions) Regulations 2026¹.

Under the change, only the first £2,000 of employer pension contributions made through salary sacrifice by each employee will be exempt from NICs, with employer and employee NICs charged on any excess¹. The Actuary's report states the measure is contained in the National Insurance Contributions (Employer Pensions Contributions) Bill 2025¹. The Low Incomes Tax Reform Group says there is currently no limit to the NIC relief employees and employers can receive on pension contributions made through salary sacrifice, apart from the rule that a salary sacrifice arrangement cannot reduce cash pay below the relevant national minimum wage or national living wage rates².

The Actuary's report projects that the salary sacrifice cap, together with an extension of the freeze in most NICs limits and thresholds from April 2028 to April 2031 and changes to voluntary NICs for people abroad, will increase National Insurance Fund income by £0.4bn in 2028-2029, £3.7bn in 2029-2030 and £4.3bn in 2030-2031¹. The report also notes that the Upper Earnings Limit, Lower Profits Limit, Upper Profits Limit, Primary Threshold and Secondary Threshold are assumed to remain constant at their 2021-2022 level up to and including 2030-2031¹.

The Universities Superannuation Scheme (USS) tells members that from April 2029 only the first £2,000 of pension contributions paid through salary sacrifice each year will be exempt from National Insurance contributions, describing it as a change announced in the November 2025 Budget³. USS says members pay 6.1% of salary and employers pay 14.5% of salary each month towards benefits and running USS³. It notes that salary sacrifice means agreeing to give up part of salary that would usually go towards pension contributions, with the employer paying the contributions instead, which can mean lower National Insurance contributions for both and higher take-home pay³. USS also says salary sacrifice can affect the amount a member is eligible to borrow for a mortgage or other finance, and that members with less than two years in USS who use salary sacrifice cannot get a refund of contributions when they leave³.

The Low Incomes Tax Reform Group says that under a salary sacrifice arrangement an employee gives up part of their salary in return for a larger employer pension contribution, and that the arrangement may affect future calculations of pensions, redundancy pay, statutory maternity pay, paternity pay and shared parental pay². It gives the example of a part-time worker earning £11,700 a year who pays no income tax or employee NICs and is in a relief at source pension scheme: opting into salary sacrifice would cost £20 more for the same £100 contribution, because the 20% tax relief available under relief at source is lost².

Why it matters for households

The cap applies to employees whose employers run pension salary sacrifice, from 6 April 2029¹. Above £2,000 of employer pension contributions a year made this way, both the employee and the employer pay National Insurance on the excess, which reduces the NIC saving that salary sacrifice currently produces¹. The change does not alter the tax relief given on pension contributions; it changes the National Insurance treatment of contributions made through salary sacrifice².

For employees, the practical effect depends on how much of their pay is sacrificed and on whether they pay employee NICs at all. The Low Incomes Tax Reform Group notes that a low earner who pays no employee NICs gets no NIC saving from salary sacrifice and can be worse off than under relief at source, because the 20% tax relief is lost². USS tells members that salary sacrifice can affect borrowing eligibility and that refunds of contributions are not available on leaving for those with less than two years in the scheme who use it³.

The Actuary's report also sets out benefit uprating from April 2026: the full rate of the basic State Pension rises from £176.45 to £184.90 a week, and the full rate of the new State Pension rises from £230.25 to £241.30 a week¹. State Pension age is increasing from 66 to 67 between April 2026 and March 2028¹.

What happens next

The measure is set out in the National Insurance Contributions (Employer Pensions Contributions) Bill 2025 and takes effect from 6 April 2029¹. The Actuary's report projects National Insurance Fund income to 2030-2031 and says the next Quinquennial Review of the Fund, with an effective date of 1 April 2025, will update longer-term projections¹. It also notes that the third State Pension age review and the Pensions Commission, launched in July 2025, are considering aspects of the pensions system, and that outcomes from the State Pension age review may significantly affect future projections of the Fund balance¹. No further detail on how employers will operate the cap has been reported.