Charging NICs on salary-sacrificed pensions contributions

The measure

Currently, employer contributions to registered pension schemes are exempt from employer and employee National Insurance Contributions (NICs). Pension salary sacrifice schemes work by converting employee pension contributions, salary or bonuses, which would otherwise be subject to Class 1 employee and employer NICs, into employer contributions. This currently results in lower NICs for employees and employers.

Under proposals announced at the Autumn Budget 2025, salary-sacrificed pension contributions above an annual £2,000 threshold will no longer be exempt from NICs from April 2029. After the change, salary-sacrificed pension contributions above £2,000 will be treated as ordinary employee pension contributions and be subject to both employer and employee NICs.

Currently, salary sacrifice can save employees 8% or 2% in NIC on the amounts that they contribute, whilst employers save 15% on the same amount, plus 0.5% Apprenticeship Levy for employers who pay the levy. For example, if an employee earning £50,000 sacrifices 10% of their salary, their income tax and NIC is currently calculated based on the reduced salary of £45,000. The proposals will cause the employee’s NIC deductions in their payslips for 2029/30 to increase by £240 over the course of the tax year. The employer’s NIC will increase by £450 and the Apprenticeship Levy by £15.

Who will be affected?

Employers who currently operate salary sacrifice for UK-registered pension schemes, and employees who currently make contributions via salary sacrifice.

When will the measure come into effect?

The changes will come into effect from 6 April 2029.

Our view

This policy shift necessitates a comprehensive review by employers of their current pension arrangements, payroll processes, and employee communication strategies. Employers will welcome the additional time given until 2029 to consider and implement changes to their pension provision.

Employers should consider the following areas:

Review of existing pension arrangements:
including an assessment of the wider employee benefit provision and appropriate employer pension contribution levels, taking into account the ability to change existing arrangements and new employment contracts.
Operational and administrative impacts:
Employers will have to navigate new payroll complexities, including the operation of the £2,000 cap, and discuss the changes with pension providers.
Impact on other employee benefits and arrangements:
Employers will need to assess the impact on the provision of life assurance, bonus waiver/ termination arrangements and pension cash alternatives.
Employee communication and engagement:
Unwinding or restricting salary sacrifice schemes could lead to higher gross pay for employees. Employers may wish to consider the impact of any such changes on employee groups with higher marginal tax rates or ‘cliff edges’, e.g. for tax-free childcare, and for employees making student loan repayments or in receipt of state benefits (e.g. Universal Credit).

Careful management of the employee communication of any changes will be essential.