Budget 2025: what it means for you

Salary sacrifice pension contributions above £2,000 will face National Insurance from April 2029.

Salary sacrifice is an important and valuable feature of many workplace pension schemes. If your employer offers a salary sacrifice pension scheme, you can agree to give up part of your salary. Instead of paying the money to you as income, your employer pays it directly into your retirement fund as employer contributions.

Because the money goes straight into your pension before tax and National Insurance are deducted, you will only pay it based on deductions from your wages, not the full amount. This means you could get a higher take-home pay than if you made standard pension contributions from your salary, and a larger total pension contribution, depending on whether your company provides their own NIC savings.

Malli Kini, partner at Blick Rothenberg, said: “Eliminating salary sacrifice for pensions means dismantling one of the most effective and widely used savings mechanisms in the UK. More than 7 million employees rely on it to increase pension contributions and reduce National Insurance, while employers rely on it to manage payroll costs efficiently.”

“Crucially, salary sacrifice is also the only practical and legal planning tool available to taxpayers caught in the £100,000 tax gap, where withdrawing the personal allowance creates an effective 60% marginal tax rate of between £100,000 and £125,140.

“Abolishing it would trap thousands of senior professionals, including NHS consultants, senior public sector staff, finance professionals and business owners. They would be in a punishing tax domain and there would be no realistic way out other than to demand lower wages.”

Despite the changes, experts urge people not to make knee-jerk reactions, which could reduce their overall retirement savings.

Andrew Marker, head of retail pensions at Vanguard Europe, said: “Based on current guidance, despite these changes, most investors would be wise to stick to their existing plans. The exact impact will depend on your personal circumstances, but taking hasty action could leave you losing thousands of pounds in retirement.

“For example, someone earning £48,000, and sacrificing £5,000 of their salary, would have £3,040 less in their pension over 30 years, as a result of additional national insurance contributions. However, if they reduced the amount they sacrificed to the new £2,000 limit, their pension amount would be reduced by £23,459.

“The impact will be greater for those on higher incomes. Someone earning £75,000 will have £5,800 less in their pension over 30 years if they make no changes to their salary sacrifice, but £67,450 less if they decide to cut their contributions to the £2,000 limit.

“Pensions remain one of the best ways for most people to save for retirement, given the tax relief on contributions, tax-free growth and tax-free lump sum cash payments.”