From 6 April 2029, salary or bonus sacrificed into a pension above £2,000 a year will be liable to both employee and employer Class 1 National Insurance. The first £2,000 per employee stays free of National Insurance. Income tax relief on the contributions does not change, and ordinary employer contributions that are not paid in exchange for salary stay free of National Insurance. The change was announced at Autumn Budget 2025 and is now law: the National Insurance Contributions (Employer Pensions Contributions) Act 2026 received Royal Assent on 29 April 2026. This guide explains what the Act does, who is affected and how to estimate the cost.
How salary sacrifice works today
Under salary sacrifice, which HMRC calls an optional remuneration arrangement, an employee agrees to a lower contractual salary or bonus. In return the employer pays the same amount into the employee's pension as an employer contribution. Most other salary sacrifice benefits lost their tax advantage in April 2017. Pension contributions were excluded from those rules, so a sacrificed amount currently escapes:
- Income tax. The sacrificed pay is never taxed as earnings;
- Employee National Insurance. This is 8% between the primary threshold and the upper earnings limit, and 2% above it, in 2026/27;
- Employer National Insurance. This is 15% above the secondary threshold in 2026/27.
Sacrifice cannot take an employee's pay below the National Minimum Wage. HMRC estimates that 7.7 million employees use salary sacrifice for pensions, and that 3.3 million of them sacrifice more than £2,000 a year.
What the 2026 Act changes
The Act inserts new subsections (6A) to (6E) into section 4 of the Social Security Contributions and Benefits Act 1992. Regulations can then treat the amount given up for a pension contribution under an optional remuneration arrangement as earnings for Class 1 purposes. The key points are:
- Start date. The change has effect for 2029/30 and later tax years;
- The £2,000 limit. The first regulations must set the "contributions limit" at £2,000 for a tax year. Amounts up to the limit are not treated as earnings;
- Pay periods. Regulations may set weekly or monthly equivalents of the limit, rounded up by no more than £1;
- Future cuts need a vote. Regulations that reduce the limit can only be made in draft form approved by both Houses of Parliament;
- Bonuses count. HMRC's impact note covers salary or bonuses given up for pension contributions.
The detailed design, including how the limit is applied through payroll, is left to regulations that have not yet been made. HMRC says employers will report the total amount sacrificed through their existing payroll software. It has also said further guidance will be published before April 2029.
What stays the same
- Income tax relief. Sacrificed contributions remain free of income tax, subject to the usual limits;
- Ordinary employer contributions. Employer contributions that are not paid in exchange for salary remain free of National Insurance;
- Adjusted net income. Sacrifice still reduces adjusted net income. That matters for the personal allowance taper above £100,000, Child Benefit and Tax-Free Childcare.
Worked examples at 2026/27 rates
The rates for 2029/30 are not yet known. These examples use 2026/27 rates and assume each employee sacrifices the same amount every month, so the whole excess falls in the band shown. They are our arithmetic.
| Basic rate employee | Higher earner | |
|---|---|---|
| Salary before sacrifice | £35,000 | £80,000 |
| Amount sacrificed (10%) | £3,500 | £8,000 |
| Excess over £2,000 | £1,500 | £6,000 |
| Extra employee National Insurance | £120 (8%) | £120 (2%) |
| Extra employer National Insurance | £225 (15%) | £900 (15%) |
Two points stand out. The higher earner's employee cost is small, because their remaining pay is already above the £50,270 upper earnings limit, where only 2% applies. The employer's cost is the larger one in both cases. An employer with 50 staff in the higher earner's position would face about £45,000 a year in extra employer National Insurance at today's rates. HMRC's own estimate is an average extra employee liability of £84 in 2029/30 for those affected.
What employers and employees should do now
- Map the exposure. List each employee's annual sacrifice, including any bonus sacrifice, and find everyone above £2,000;
- Review scheme design. If you pass part of your National Insurance saving back to staff as an extra pension contribution, there will be less saving to share on amounts above the limit from 2029/30;
- Check contracts and payroll. Salary sacrifice depends on a valid contractual variation, and payroll software must split the first £2,000 from the excess once the regulations are made;
- Keep the income tax planning. For employees near £100,000 or the Child Benefit threshold, sacrifice still lowers adjusted net income. The income tax and allowance savings will often outweigh 2% employee National Insurance.
The other pension change in the same period
The "pension tax raid" headlines also cover inheritance tax. Under Finance Act 2026, most unused pension funds and lump sum death benefits will be treated as part of a member's estate for inheritance tax. This applies to deaths on or after 6 April 2027, two years before the salary sacrifice cap. Our guide to inheritance tax on pensions covers that change. See also employer pension contributions and the £100k tax trap.
Sources: National Insurance Contributions (Employer Pensions Contributions) Act 2026; HMRC: Salary sacrifice reform for pension contributions; GOV.UK: Changes to salary sacrifice for pensions from April 2029; HMRC: Rates and thresholds for employers 2026 to 2027; Finance Act 2026, s71 (commencement of the pension inheritance tax rules in ss66 to 70).
If you run a salary sacrifice scheme and want to cost the 2029 change or redesign it, our employment tax and pension administration teams can help.