Salary sacrifice: pension tax contributions cap changes in 2025 Budget may see millions in UK lose out
Experts say it could discourage pension saving and leave workers questioning how best to protect their future ⚠️
- A new £2,000 cap on salary-sacrificed pension contributions will apply from April 2029
- Contributions above the cap will no longer be exempt from National Insurance for workers and employers
- Pension experts warn the change could discourage saving and shrink workers’ long-term retirement pots
- Even small losses in NI savings may lead some employees to cut contributions or abandon salary sacrifice
- Some fear the Treasury may raise far less than expected as firms restructure schemes before the change
Workers who use salary sacrifice to boost their pension pots could see their take-home pay squeezed under reforms confirmed in Rachel Reeves’ 2025 Budget, prompting warnings that millions may scale back long-term saving.
Salary sacrifice has long been a popular, and tax-efficient, way to pay into a workplace pension.
Instead of paying a contribution from your salary, you “give up” part of your pay and your employer pays that amount directly into your pension on your behalf.
Because National Insurance (NI) is calculated on your post-sacrifice salary, both you and your employer usually pay less NI overall. That means you can save more for retirement without reducing your take-home pay by as much.
What changes to salary sacrifice were announced?
From April 2029, only the first £2,000 of employee pension contributions made via salary sacrifice each year will remain exempt from NI.
Above that, both employer and employee NI will apply, treating those contributions like standard pension payments.
The Government argues that this makes the system “fairer and more sustainable”, pointing out that most of the tax benefit flows to higher earners who sacrifice larger slices of pay.
No one will need to contact HMRC, employers will handle the adjustment through payroll.
Why are pension experts worried?
Industry groups say the change undermines one of the most efficient tools to encourage long-term saving, with the Association of British Insurers labelling the cap a “short-sighted tax grab”.
Wealth management company Quilter says salary sacrifice has been a “cornerstone” of workplace pensions and that restricting it will lead to cutbacks.
A survey by the company found that 25% of workers would stop using salary sacrifice if the tax perks diminish, while nearly one in five would contribute less.
There are also wider concerns, with experts suggesting employers may trim workplace pension generosity or slow down pay growth to cover rising NI costs.
With frozen tax thresholds already squeezing incomes, any additional drag on take-home pay could be felt sharply.
How much could workers lose?
On paper, the amounts are small. Financial services company Hargreaves Lansdown estimates that a worker earning £50,000 who pays in 5% would lose about £40 a year in NI savings once the cap hits.
But pension providers say the bigger risk is behavioural, and even small reductions can discourage pension saving at a time when millions are already not putting enough aside for retirement.
Many providers stress that pensions remain strongly tax-advantaged overall, and that employer contributions, pension tax relief and automatic enrolment protections aren’t changing.
But, at a time when the UK is already “sleepwalking into a retirement crisis”, reining in a mechanism that helps people save could store up bigger problems for the future.
Will the policy raise as much money as expected?
Because the change won’t take effect until 2029, firms have years to redesign pay and pension structures to legally limit the impact.
As such, some experts believe the Treasury may struggle to generate the forecasted billions.
Former pensions minister Sir Steve Webb says it is “highly probable” the policy raises only a fraction of the expected revenue.