In the Autumn budget 2025, the Chancellor, Rachel Reeves, announced changes coming into effect in 2029, which introduces a cap on NIC relief on salary sacrifice pension contributions. This guide looks at:
- The changes coming into effect in 2029
- How these changes will affect Payroll
- What is pension salary sacrifice?
- The different ways to contribute to an employee’s pension
By outsourcing your payroll processes to MSP Payroll, you can ensure you are compliant with changes when they occur and reduce the pressure on internal resources. Speak to us to find out more.
What are the changes to Pension Salary Sacrifice?
In 2029, an annual allowance cap of £2,000 on pension contributions paid through salary sacrifice will be introduced. Above the £2,000 annual limit, employees will be required, through their PAYE, to pay National Insurance Contributions, the same as they would do when adding to their pension scheme through different methods (outlined below). Employees can contribute more than £2,000 per year towards their pension by sacrificing a portion of their salary, but they should be made aware that it will now be subject to NIC as per their normal rate.
The Government has announced this change as they believe the impact on national finances from salary sacrifice pension contributions will increase by £6bn per annum (from £2bn to £8bn in 2029). This is because high earners are perceived as being able to afford larger salary sacrifices, thereby avoiding National Insurance by diverting funds into their pension. By setting a cap, it is believed that the financial hole will be accommodated for, while only affecting around 25% of current employees.
The Government has stated in its announcement that the responsibility for calculating, declaring and paying the NIC contributions on behalf of employees who meet the new criteria will sit wholly with the employer and should be managed through the Payroll process. By 2029, it is expected that NIC for salary-sacrificed pension contributions will be managed through Payroll software or third-party Payroll service providers such as MSP Payroll.
How will Salary Sacrifice NIC changes affect pensions and payroll?
Payroll teams will be required to identify which employees are contributing to their pension plan via salary sacrifice and calculate the point at which they will become subject to National Insurance contributions by exceeding the threshold.
If an employee does cross the threshold, then adjustments to future national insurance contributions may need to be made.
Payroll teams will also need to communicate and educate employees about the changes that are approaching, and the financial impact this may for them. Alternative methods of pension contribution should be explained and offered when employees request them.
Regarding payroll software, teams should assess their current software package and speak to providers to find out whether their development roadmap includes salary sacrifice NIC thresholds.
If you are looking for a resource-efficient way to manage your payroll, then consider outsourcing to a third-party Payroll Services provider such as MSP Payroll. You can contact us here.
What is Pension Salary Sacrifice?
Salary sacrifice is a method of contributing to a pension by removing the total value of the contribution from an employee’s gross salary before they pay income tax or NIC. This has been a cost-effective way of increasing employee pensions, because the gross salary is reduced, so the amount of taxable pay is also reduced. This can result in some employees, particularly if they are higher earners, taking home more net pay each period because they fall below tax thresholds.
To contribute through salary sacrifice, the employee must agree to reduce their salary or wages by the agreed contribution level. This can mean that some employees impact other benefits or thresholds because their overall salary is reduced, so any employee wishing to contribute in this way should be fully informed before agreeing.
With the new changes, an employee who reassigns a portion of their salary under £2,000 to their pension will not be required to pay National Insurance Contributions. Once the annual amount sacrificed exceeds £2,000, then they should start contributing to NI.
What are the other methods of pension contributions through payroll?
Alongside salary sacrifice, there are two ways for an employee (and employer) to contribute to a pension. Bear in mind that an employee’s total contribution each pay period should be a minimum of 8% when combined with the employer’s contribution. See our article on pension auto-enrolment for more information.
Pension deductions from after-tax earnings (relief at source)
Whereas salary sacrifice takes the contribution from the employee’s gross salary, and tax and NIC are calculated from the remaining total. Pensions that are deducted from after-tax earnings are contributions that have already been subject to tax and NIC. The main difference between pension contributions from after-tax earnings and salary sacrifice is that the government will contribute an additional 20% of tax relief on the employee’s after-tax earnings.
For payroll teams, they should be aware that the additional government contributions are collected by the pension provider, NOT the payroll team. This is a relatively simple way to manage pension contributions, as both employer and employee agree on a monthly static amount or percentage, which is then deducted during each payroll period. Pension reporting is made through the usual RTI.
Pension deductions before tax other than salary sacrifice (net pay arrangements)
Pension contributions can be made on a net pay arrangement where the pension deduction is made before tax, but National Insurance Contributions are made on the original gross salary. In this method, the employee pays NIC on their full salary value, but tax on the amount of salary remaining after the pension contribution has been made. The update to salary sacrifice in the November 25 budget means there are similar outcomes now for employees, but there is still a benefit of up to £2,000 for those employees who choose salary sacrifice over a net pay arrangement.
The benefit to employees is an additional boost to their take-home pay because of the lower value of tax paid. For someone on a lower tax band, this equates to £20 for every £100 of pension contribution.
For Payroll teams, a net pay arrangement requires two separate values for calculating tax and NIC for the employee. The full amount for National Insurance Contributions and the value less pension for tax.
MSP Payroll can work with your organisation to provide payroll services, regardless of the type of contribution the organisation wishes to provide. Speak to us here to find out more.
How can MSP Payroll support your pension and salary sacrifice payrolling?
MSP Payroll provides professional, accredited payroll services, including:
- Processing new starters, leavers and apprentices accurately
- Ongoing Payroll services for your entire organisation, tailored to your requirements
- Calculating final pay, tax and NIC contributions accurately regardless of pension contribution method.
- We can ensure your payments to employees are compliant with the latest HMRC and government developments.
Speak to us today to find out more.
Payroll and Pensions: Frequently asked questions
Who is responsible for declaring an employee’s salary sacrifice pension contribution?
According to the latest government announcement, following the November 2025 budget, the employer will be wholly responsible for ensuring that HMRC are updated on employees’ method of pension contribution, and where it is salary sacrifice, the point at which they are liable for NIC. It is recommended that this is done through the employer’s payroll software.
MSP Payroll can support your organisation and ensure your RTI submissions are compliant with the latest regulatory changes, as they happen.
What do employees need to know about the change to pension salary sacrifice?
Payroll and HR teams should consider a robust plan of communication in the lead-up to the 2029 NIC changes. Employees who currently use salary sacrifice for their pension contributions should be informed in writing and verbally that the amount they pay toward National Insurance will increase if their contribution exceeds £2,000. They should also be provided with the option to change their employee contribution method if they wish, and be advised to speak with an independent pensions advisor.
Will payroll systems automatically apply the salary sacrifice NIC cap?
This will depend on your payroll software provider and how integrated your payroll process is. Software providers have until 2029 to develop their systems to account for the change, but understanding and training will be important to payroll teams to ensure they remain compliant with HMRC. Speak to MSP Payroll about outsourcing your payroll processes. We will ensure your organisation remains ahead of new developments.
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