The Autumn UK Budget 2025 is tomorrow and one of the most talked‑about potential tax changes is a new cap on salary sacrifice pension National Insurance (NI) savings. If the rumoured proposals are confirmed, employees and employers could soon face a limit, which is widely speculated to be £2,000 per employee per tax year, on how much salary sacrifice can be sheltered from NI when paid into pensions.
To help you understand what this could mean for your finances, we have built this dedicated salary sacrifice pension cap calculator. This tool models how your take‑home pay and effective tax position might change if the NI exemption on pension salary sacrifice is restricted.
Use the calculator now or read on to learn:
- How salary sacrifice pension schemes work today
- What the proposed £2,000 NI cap could look like in practice
- Who is likely to be most affected (and who may be less exposed!)
- How to use our salary sacrifice cap calculator to estimate your personal impact
- What this could mean alongside other possible Budget 2025 tax changes
The Long‑Running Debate on Salary Sacrifice
The idea of restricting or even abolishing salary sacrifice is not new. Almost a decade ago we analysed the potential possible end of salary sacrifice schemes, when HMRC and the Treasury first began signalling that too much tax was being lost via flexible benefit arrangements.
Over the years, successive governments have chipped away at specific perks but have generally left pension salary sacrifice intact, recognising it as a powerful driver of long‑term retirement saving. However, with public finances under extreme pressure, the new Chancellor Rachel Reeves is under intense pressure to find "stealth" revenue raisers that can be presented as closing loopholes rather than breaking manifesto promises on headline tax rates.
We have already been tracking and predicting potential tax rises in our article on the Budget 2025 predictions, and the emerging rumours around capping salary sacrifice NI savings fit neatly into that wider pattern of threshold freezes, base rate increases, and expanded NI charges.
How Salary Sacrifice Pension Schemes Work Today
A salary sacrifice pension scheme is an agreement between you and your employer where you voluntarily give up part of your gross salary in exchange for a pension contribution paid by your employer. Instead of you making a personal contribution out of taxed income, your employer contributes directly on your behalf.
The key benefits are:
- Income tax relief: Pension contributions receive tax relief, whether via relief at source or Net Pay. Salary sacrifice effectively converts taxable salary into an employer contribution, preserving the tax advantage.
- Employee NI savings: Because your contractual salary is reduced, you don’t pay employee National Insurance on the sacrificed amount.
- Employer NI savings: Your employer also pays less employer NI, as their NI bill is based on your lower post‑sacrifice salary.
Currently, there is no specific NI cap on how much salary can be sacrificed into pensions, beyond general limits like the annual allowance and practical employer scheme rules. This has made salary sacrifice particularly attractive for:
- Higher earners looking to manage effective tax rates and the £100,000 personal allowance taper
- Employees wanting to push pension funding while reducing both tax and NI
- Employers seeking to offer richer benefits without proportionally increasing total payroll costs
The Rumoured £2,000 NI Exemption Cap on Salary Sacrifice Pensions
The new proposal being widely discussed ahead of the Budget is not to abolish salary sacrifice entirely, but to limit the National Insurance benefit that can arise from using it for pension contributions.
The central rumour is that from a future tax year (from April 2029), the NI‑free portion of salary sacrificed into pensions would be capped at £2,000 per employee per year. Above this cap:
- The sacrificed amount would still be treated as an employer pension contribution, so income tax treatment of pensions remains broadly unchanged.
- However, the employee would pay National Insurance on any equivalent salary above the £2,000 NI‑free threshold, at their normal NI rate (for example, around 8% for basic‑rate NI and 2% above the upper threshold).
- Employer NI savings would also be restricted accordingly, increasing effective employment costs for generous schemes.
In other words, the Government is eyeing pension salary sacrifice as a way to raise money by re‑introducing NI on part of what is currently NI‑free sacrifice, without having to raise NI rates or headline income tax bands.
Who Would Be Hit Hardest by a Salary Sacrifice Pension Cap?
A £2,000 NI cap would not affect everyone equally. Our analysis, supported by our salary sacrifice pension cap calculator, suggests three main groups:
1. Higher earners making large pension salary sacrifice contributions
Employees who sacrifice significantly more than £2,000 a year into their pension; especially those near or above the £100,000 income mark – could see:
- A sizeable increase in their annual NI bill
- A reduced ability to use salary sacrifice to manage the harsh effective tax rate created by the personal allowance taper
- Less overall efficiency when fully utilising the annual allowance
2. Employers using salary sacrifice as a key benefit and cost‑management tool
For many employers, salary sacrifice has been a valuable lever to:
- Offer enhanced pension contributions without pushing up total remuneration costs as much
- Offset the impact of recent income tax and NI changes that increased the cost of employing staff, a trend we have examined in depth with tools like our Employers NIC rise calculator.
- Improve recruitment and retention in a tight labour market
Removing or capping the NI advantage means employers may face higher effective costs for the same level of pension benefit, or be forced to re‑design benefit packages.
3. Employees relying on salary sacrifice across multiple schemes
Some employees use salary sacrifice not just for pensions, but also in areas like electric vehicle (EV) leasing and cycle‑to‑work schemes. We have previously explored how salary sacrifice and electric vehicles have been central to driving the company car market, and we provide detailed information on salary sacrifice EV leasing options.
While current signals suggest that EV salary sacrifice schemes may be protected until at least 2030, any broad cap on NI advantages could, over time, make flexible benefits more complex, and people who have built their overall reward strategy around salary sacrifice will need to model various scenarios carefully.
Using the Salary Sacrifice Pension Cap Calculator
To give you a personalised view of the potential impact, we have created this salary sacrifice pension cap calculator; it's designed around the rumoured policy parameters and allows you to adjust key inputs, such as:
- Your gross annual salary
- Your current pension salary sacrifice amount
- Your marginal income tax and NI bands
- The assumed £2,000 NI‑free cap on pension salary sacrifice
The calculator then estimates:
- Your take‑home pay under current rules
- Your take‑home pay if the cap is introduced
- The difference in employee NI that you would pay
- The impact on your employer’s NI savings (and hence potential room for them to share savings)
- Your effective net cost of contributing each extra pound into your pension
By moving changing the inputs in the calculator, you can model:
- How much extra NI you would pay if you keep your current pension sacrifice level
- Whether a different mix of employer contribution vs. personal contribution might be more efficient
Example: High Earner Sacrificing £10,000 into a Pension
Consider an employee earning £80,000 a year who currently sacrifices £10,000 of salary into their pension via salary sacrifice:
- Under current rules, the full £10,000 is exempt from employee NI, saving them several hundred pounds a year.
- The employer also saves employer NI on that £10,000, which can sometimes be partly rebated into the pension.
Under the proposed £2,000 NI exemption cap:
- The first £2,000 of sacrificed salary still avoids employee NI.
- The remaining £8,000 would be treated as if it were subject to normal NI for the employee.
- If the employee is mainly in the standard NI band, they might pay roughly 8% NI on that £8,000, which is around £640 extra NI per year.
Our calculator lets you plug in this scenario and see the results in detail, taking account of the specific thresholds in force.
Interaction with Other Autumn Budget 2025 Tax Changes
A cap on salary sacrifice pension NI savings is unlikely to appear in isolation. As we have already discussed in our coverage of how the Chancellor may break the promise not to raise taxes, there are various levers available, including:
- Continue to extend further the tax thresholds, or maybe even think about lowering thresholds and allowances
- Direct increases in income tax rates – such as the hypothetical scenario we analysed using our 2 pence rise in income tax calculator
- Extending NI to broader classes of income, as considered in our National Insurance deductions on unearned income calculator
A salary sacrifice cap would sit alongside these measures as part of a wider strategy to increase the overall tax burden, particularly on higher earners and those with more scope to exploit reliefs. The combined effect of:
- Frozen thresholds
- Possible base rate rises
- Expanded NI on salary sacrifice and perhaps unearned income
... could significantly alter the calculations around how much it is worth sacrificing into a pension, and how employers structure their reward packages.
What Should Employees and Employers Do Now?
Until tomorrow's Budget 2025 speech, all of this remains speculative. However, the direction of travel is clear: the Government is actively exploring ways to limit the NI advantages of salary sacrifice, particularly for pensions, because it is one of the few remaining routes to substantial, legitimate tax and NI savings.
Some practical steps to consider now:
- Model different scenarios using the salary sacrifice pension cap calculator – see your position under current rules and under a potential £2,000 NI exemption cap.
- Review your pension funding strategy: If you are heavily reliant on salary sacrifice, think about how you would respond if the NI savings were partially removed.
- Employers should review their reward structures, especially for senior staff, to understand the combined impact of salary sacrifice changes, income tax shifts, and NI on unearned income.
- Stay informed: We will update our calculators and publish fresh analysis immediately after the Budget, so you can see the exact numbers using your own data.
As soon as the Chancellor delivers the Budget 2025 statement, we will update our tools and publish detailed commentary on the confirmed rules.