National Insurance relief on pension contributions capped from April 2029; what employers and employees need to know – Autumn Budget 2025

The chancellor, Rachel Reeves, has announced a major change to salary sacrifice for pension contributions by employees. From April 2029, only the first £2,000 of employee contributions per year will be exempt from National Insurance contributions (“NIC”).

This change will affect higher earners who exchange some of their salary for additional employer pension contributions, either on a regular basis, or waiver of bonuses into pension.

Current position

Employees can contribute to workplace pensions in three main ways, each with different tax and NIC treatment: 

• Net pay: Contributions deducted after NIC but before income tax; with both employee and employer paying NIC and no extra tax reclaim needed. 

• Relief at source: Contributions deducted after NIC and income tax allowing 20% tax relief; higher-rate taxpayers then reclaim additional relief via their tax return. 

• Salary sacrifice: Employee gives up salary in exchange for employer contributions; this reduces taxable salary with no NIC or income tax on employer contributions.

What’s changing?

From April 2029 only the first £2,000 of an employee’s salary sacrifice for pension contributions will be exempt from NIC. Thereafter, contributions will attract NIC based on the level of salary sacrificed, with the cost being:

• Employer NIC at 15% on the whole excess 

• Employee NIC at 8% (or 2% above the upper earnings limit)

Income tax relief remains unchanged.

The proposed change only affects the salary sacrifice route. Any excess contributions above the cap will still benefit from income tax relief in full, giving a similar result to net pay and relief at source.  The cap does not affect any employer contributions which are not made in exchange for a salary sacrifice.

Impact on employers

Auto enrolment contributions

Most employees making minimum pension contributions under auto enrolment will not be affected.  At the top level of mandatory pension contributions, where the employee’s salary is £50,270 or more, there will only be small increases in the NIC liabilities: 

Enhanced standard contributions example

Where more generous pension schemes are offered, often devised to encourage employees to make further contributions, employers will see extra NIC costs on their higher earners. 

For example, for an employer who as standard requests a 5% employee contribution on full salary and will make a 3% employer contribution the changes will be as follows: 

For most employees, the extra cost is minimal, but employers face higher NIC bills on these enhanced contributions as the 15% employer NIC rate applies to the excess.

Historically, employers may have shared this NIC saving with employees.  This offer will need to be reconsidered.

Large additional contributions example

The impact of these changes is more pronounced for employees who are making significant additional contributions, either on a regular basis, or from bonuses.   

As an example, an employee on a £50,000 salary who contributes 17% employee and 3% employer into their pension under salary sacrifice will see a larger increase in their liabilities, being: 

You will note that the employer again suffers a larger increase. This example highlights why planning ahead is essential for employees making large contributions.

It is worth noting that the employer would be expected to receive tax relief on the additional NIC, reducing the post-tax cost.

What should you do now?

Whilst the rules do not take effect until April 2029, we recommend that employers and higher paid employees start to:

• Review salary sacrifice arrangements and identify employees contributing above £2,000. 
• Check for agreements which share employer’s NIC savings from salary sacrifice with employees. 
• Communicate changes early to avoid surprises. 
• Consider alternatives: Employers may offer to increase standard employer contributions instead of a pay rise, as these remain NIC-free. 

At Kreston Reeves we can assist with this review, such as assessing your payroll and pension arrangements, provide NIC modelling for different scenarios and advise on alternative strategies to maintain tax efficiency.  Working with a Financial Adviser early in the process may also be a valuable. 

Next steps 

Further HMRC guidance will be published before the changes are introduced in April 2029.  

If the Budget has raised any questions for you, or if you would like any further information or guidance on this topic, get in touch with your usual Kreston Reeves contact or contact us here.