Salary sacrifice and pensions may be under review in the Autumn Budget 2025

How salary sacrifice works

Under a salary sacrifice arrangement, an employee agrees to forgo part of their salary in exchange for an equivalent pension contribution paid directly by their employer.

This delivers several advantages:

• Income Tax and NI savings for employees, since contributions are made before tax
• NI savings for employers, who pay less on reduced gross salaries
• An opportunity for employees to manage taxable income and remain below key thresholds – for example, keeping income under £100,000 (where the personal allowance is lost) or £60,000 (to retain full Child Benefit entitlement)

For a refresher on pension planning and how private pensions work, you can watch our webinar.

What is potentially changing?

Currently, there is no specific cap on the amount that can be contributed to a pension via salary sacrifice, although total pension contributions above the £60,000 annual allowance are subject to tax charges, in some circumstances, where income is more than £200,000 this £60,000 may also be tapered.

However, speculation ahead of the upcoming Budget suggests that the tax advantages of salary sacrifice could be curtailed.

The rumoured reform would introduce a £2,000 cap on the portion of salary that can be sacrificed without triggering National Insurance Contributions. In which case, both employees and employers would pay NI on any pension contributions made through salary sacrifice above £2,000 per year.

What would this mean in practice?

To illustrate:

• An employee earning £40,000 who sacrifices 5% of salary (£2,000) for pension contributions would be unaffected.

However higher earners or those with higher sacrificed amounts going into a pension are going to shoulder the burden of these changes, by contrast:

• A higher earner on £125,000 sacrificing £25,000 to a pension, to bring taxable income below £100,000 (a common tax planning strategy) – would face an additional £460 in employee NI each year, while the employer’s NI bill would rise by around £3,450.

A double blow for employers and savers

This proposal follows recent increases to employer National Insurance rates and would further add to the cost pressures facing businesses.

For individuals, the change could also come at a time when the attractiveness of pension saving is already under strain. From April 2027, pension funds are set to fall within the scope of Inheritance Tax, a significant policy shift that could discourage long-term retirement saving.

Will this undermine the UK’s savings culture?

While the Treasury may benefit from additional short-term revenue, a cap on salary sacrifice could undermine incentives to save for retirement and penalise both employers and savers.

How we can help

At Gravita, we can help you navigate the potential changes to salary sacrifice and pension tax relief by reviewing your current arrangements and identifying alternative, tax-efficient strategies to maintain your retirement savings goals.

We can also support employers in assessing the wider payroll and cost implications, ensuring compliance while optimising employee benefits.