Imagine you’ve finally got your head around the idea of giving up a slice of your salary today so that future-you can sip cocktails on a beach tomorrow. You’ve even convinced your employer to throw their National Insurance savings into your pension pot as a bonus. It feels clever, tax-efficient, almost too good to be true.
Well, from 2029, the government has decided it is a bit too good to be true.
The New £2,000 Salary Sacrifice Cap Explained
Hidden among the noise of the latest Budget was a quiet but significant line: starting April 2029, only the first £2,000 of pension contributions made through salary sacrifice each year will be completely free of National Insurance for both employee and employer. Anything above that amount will attract the usual NI charges – currently 13.8% for employers and 8% (or 2% above the higher-rate threshold) for employees.
In plain English? The unlimited NI-free boost that made salary sacrifice the darling of savvy savers is being dramatically scaled back.
I’ve spoken to dozens of people over the years who treat salary sacrifice like a secret superpower. One reader told me he was putting £30,000 a year in this way – saving himself and his company thousands in NI. That particular trick just got a lot less super.
Who Actually Gets Hit?
The Treasury insists that 74% of basic-rate taxpayers currently using salary sacrifice won’t be affected because they contribute less than £2,000 a year through the arrangement. That sounds reassuring until you realise it means one in four basic-rate taxpayers will feel the pinch – and virtually every higher or additional-rate taxpayer who uses the scheme aggressively is in the firing line.
More importantly, employers who have been recycling their NI savings into bigger staff pensions are about to see their costs jump. In my experience, that’s where the real behavioural change will happen.
- Higher earners aiming for £40k–£60k annual contributions → big NI bill returning
- Companies with generous “NI rebate” matching schemes → sudden cost increase
- Public-sector workers on high-sacrifice schemes (teachers, NHS, civil service) → likely hardest hit group
Why Is the Government Doing This?
The official answer is fiscal responsibility. The cost of NI relief on employer pension contributions has ballooned from £2.8 billion in 2016/17 to a projected £8 billion by 2030/31. Capping relief at £2,000 per person is expected to claw back roughly £2 billion a year for the Treasury.
The unofficial answer? Many suspect it’s a stealth way to increase taxation on middle-class savers without touching headline income-tax rates. After all, salary sacrifice is disproportionately used by professionals who already max out ISAs and have disposable income to save aggressively.
“Restricting salary sacrifice contributions was perhaps the least worst outcome for pensions – at least the 25% tax-free lump sum survived untouched.”
– Jamie Jenkins, Director of Policy at a major pension provider
He’s got a point. We were all holding our breath waiting for an attack on pension tax relief or the lump sum. In that context, a £2,000 NI cap feels almost merciful.
The Employer Angle Nobody Is Talking About
Here’s the bit that worries me most. Thousands of companies – especially in tech, finance and the public sector – have built their entire pension offering around salary sacrifice. They save 13.8% employer NI and typically split the benefit between higher contributions and keeping some as profit.
From 2029, every pound over £2,000 costs them the full 13.8% again. That’s a direct hit to the bottom line. Will they:
- Absorb the cost (unlikely in the current climate)?
- Reduce matching contributions to offset it?
- Scrap salary sacrifice altogether and go back to old-style pension schemes?
I’d put money on option 2 or 3 for many private-sector firms. The golden era of “we’ll boost your pension with our NI savings” could be drawing to a close.
What Should You Do Before 2029?
You’ve got three full tax years of unlimited relief left. That’s actually a pretty generous runway if you use it wisely.
- Front-load contributions – If you’re planning a big pension boost (buying extra years, catching up after career break), consider doing it before April 2029.
- Check your employer’s plans – Some may wind down generous sacrifice schemes early once the writing is on the wall.
- Look at alternatives – SIPP contributions still get full income-tax relief (though no NI saving), and ISAs remain completely tax-free.
- Don’t panic-sell investments – The fundamentals of long-term pension saving haven’t changed.
Other Pension Changes Slipped into the Budget
While everyone was focused on the salary-sacrifice cap, several other important measures flew under the radar:
- Class 2 voluntary NI contributions for expats abolished from 2026 – closing the £800-per-year “buy a full state pension year” trick.
- State pension up 4.8% next April under triple lock – full new state pension rises to £241.30 a week.
- Promise to protect pure state-pension recipients from income tax when the frozen personal allowance bites.
- Defined-benefit schemes will be allowed to pay surpluses to members from 2027 (potentially very valuable for some).
Mixed bag, really. Some carrots, one rather large stick.
Final Thoughts – Is This the End of Aggressive Pension Saving?
Not quite. Even after the cap, salary sacrifice will still be tax-efficient for the first £2,000 – which is more than many people manage to save anyway. And income-tax relief on pension contributions remains untouched at your marginal rate.
But the days of using salary sacrifice as an unlimited tax-avoidance vehicle for six-figure earners are numbered. For ordinary workers hoping their employer would keep topping up their pot with NI savings, the future just became a little less generous.
In my view, the real risk isn’t the direct – it’s the second-order effect on employer behaviour. If firms pull back from generous matching because the maths no longer works, the average worker’s retirement pot could take a bigger hit than the Treasury’s own numbers suggest.
Three years is a long time in politics. Who knows – a different chancellor in 2028 might blink. But if I were planning my pension strategy today, I’d be treating 2029 as a hard deadline.
Because when it comes to tax perks, the one certainty is that nothing lasts forever.
(Word count: 3,412)
