The Autumn Budget 2025 confirmed that pensions and salary sacrifice will remain central to long-term tax planning, but with tighter rules ahead. One important advantage – using salary sacrifice to save National Insurance on pension contributions – will be restricted over the coming years. The Budget also introduced a change to how small amounts of tax are collected from some state pensioners.
For individuals, employers and owner-managed businesses, it is worth understanding these changes now so you can plan ahead.
New NIC rules for pension salary sacrifice
Today, many employees and company directors use salary sacrifice to boost pension contributions. You agree with your employer to give up part of your gross salary, and your employer pays that amount into your pension instead. Because this reduces your contractual salary, both employer and employee National Insurance contributions (NICs) are lower. That creates an extra saving on top of the usual income tax relief.
From 6 April 2029, that NIC advantage will be capped. The Budget confirmed that:
Employer and employee NICs will be charged on pension contributions above £2,000 a year made via salary sacrifice from 6 April 2029.
In practice:
- The first £2,000 a year of pension contributions made through salary sacrifice can still benefit from reduced NICs.
- Any salary-sacrifice pension contributions above £2,000 will no longer avoid NICs. Normal NICs will apply to that part of the sacrificed salary.
The underlying income tax relief on pension contributions does not change. What is being limited is the extra NIC saving that pensions and salary sacrifice currently provide on larger contributions.
What this means for employees, directors and employers
These new rules matter most if:
- You make significant pension contributions through salary sacrifice, or
- You run a business and use salary sacrifice to help staff save for retirement tax-efficiently.
For many employees who only sacrifice small amounts each month, staying within the £2,000 annual limit may be simple. However, higher earners, company directors and people increasing contributions later in their career could see a noticeable reduction in NIC savings once the new cap applies.
Employers should also bear this in mind when designing or reviewing pension and reward packages. Salary sacrifice will still offer some NIC benefits, but the case for using it for large contributions will be weaker after April 2029.
Making use of the current window
The Budget summary includes a clear reminder for savers:
“Investing in pensions. Remember the annual allowance is £60,000, so you may be able to make larger pension contributions while the salary sacrifice opportunity remains.”
The annual allowance is the maximum you can usually contribute to pensions each year with full tax relief. For most people, this is £60,000, although it can be lower if you are a very high earner or have already flexibly accessed pension benefits.
Between now and 6 April 2029, there may be a planning window where you can:
- Increase pension contributions (within your annual allowance and overall retirement plans), and
- Still benefit from the full NIC saving on larger salary-sacrifice amounts.
The right approach will depend on your wider finances, cash flow and retirement goals, so it is sensible to review this with an adviser rather than wait until the rules change.
State pension and simple assessment
The Budget also covered how small amounts of tax are collected from some pensioners. From 2027/28:
Pensioners whose sole income is the basic or new state pension (without any increments) will not have to pay small amounts of tax through simple assessment if their state pension exceeds the personal allowance.
At present, if the state pension goes above the personal allowance (which remains at £12,570 for 2026/27), HMRC can issue a simple assessment to collect the tax due.
Under the new rule, pensioners who only receive the standard state pension will no longer have to deal with this process for small tax amounts. Further detail on how this will work in practice is expected next year, but the aim is to simplify administration for older taxpayers.
Pensions and the personal allowance – a quick reminder
The wider Budget summary also repeats an important planning point linked to pensions and the personal allowance:
- Your personal allowance of £12,570 is reduced by £1 for every £2 of income between £100,000 and £125,140.
- Once income rises above £125,140, the allowance is lost completely.
If your income falls in that band, you may be able to make a pension contribution or a charitable gift to reduce your adjusted net income below £100,000 and preserve your full personal allowance. This can be particularly valuable, as the effective marginal tax rate in this range is very high.
What should you do next?
The changes to pensions and salary sacrifice are not immediate, but they do change the landscape for long-term planning:
- Regular savers using salary sacrifice should check how much they contribute each year.
- Higher earners and company directors may want to review their pension funding strategy before the new £2,000 NIC cap takes effect.
- Employers should consider how the rule change affects benefit design and communication with staff.
Pensioners relying solely on the state pension may see a small administrative burden lifted once simple assessment changes come in.
For a detailed breakdown of the Budget’s key components, you can view the full document here.