On 29 April 2026, The National Insurance Contributions (Employer Pensions Contributions) Act 2026 (the Act) received Royal Assent. The Act places a cap on the amount of pension contributions made via salary sacrifice that will be exempt from national insurance contributions.

Published: 13 May 2026
Author: Rhiannon Barnsley-Bloomfield

What is salary sacrifice?

Salary sacrifice is a formal arrangement where an employee agrees to give up (i.e. sacrifice) a portion of their gross salary in exchange for a non-cash benefit from their employer (such as increased pension contributions). This is achieved by changing the employee’s contractual terms and conditions.

In addition to their standard employer pension contribution (which is not subject to National Insurance contributions (NICs), an employer pays the salary that has been sacrificed by an employee directly into the pension scheme. It is considered a tax-efficient way of contributing to a pension scheme as the employers pay less NICs because the employee’s gross salary is lowered. It also reduces income tax and employee NICs for the employee. Some employers pass on the NICs saved by paying some or all of the savings as increased pension contributions.

What is the background to the changes?

On 26 November 2025, the government announced at the Autumn Budget 2025 that from 6 April 2029, employee pension contributions exceeding £2,000 per annum made using salary sacrifice arrangements will be subject to NICs. The change aims “to increase fairness, while protecting ordinary workers” as the cap “makes the system fairer and more sustainable”.

Pension contributions will remain exempt from income tax, subject to the usual limits. Pension contributions made via other methods will also be unaffected.

The government has published guidance on the changes and is expected to publish further guidance before April 2029.

What is changing?

Salary sacrifice arrangements are commonly utilised for pensions and employers and employees will still be able to make use of them after April 2029, although the tax advantage of doing so will not be as significant. Employees will still be able to choose to sacrifice salary to contribute to their pension, however, any amount sacrificed in excess of £2,000 per year, will be subject to NICs (both employer and employee NICs).

Where an employer currently pays some or all of the NICs saving back into the employee’s pension, the fact that the NICs saving will be reduced could result in a reduced payment into the pension scheme for the employee or an additional cost to the employer if the payments are maintained. All employer pension contributions will continue to be free of NICs.

Employees will not need to contact HMRC themselves if the amount of salary sacrificed for pension contributions is in excess of £2,000 as it is expected that employers will make the necessary changes to ensure NICs are paid.

Key takeaways

The changes don’t come into force until 6 April 2029, and so there is no immediate action needed as much of the detail of how the cap will work is not available. The timing of the regulations is not yet known and further guidance from the government is also expected.

Employers operating salary sacrifice arrangements for pension contributions should continue to monitor developments and think about what preparations can be made to ensure HR systems are updated for the changes. Employers should also consider what changes need to be made to employee’s employment contracts and if they wish to reconsider their benefit package offering.