Millions of pension savers across the United Kingdom are set to lose part of their National Insurance (NI) advantages under new Labour plans to cap relief on salary sacrifice pension contributions from April 2029.
Under reforms confirmed in the 2025 Budget, workers will only receive National Insurance savings on the first £2,000 contributed annually into their workplace pension through salary sacrifice arrangements.
Any contributions above that threshold will no longer qualify for the NI exemption, although income tax relief will remain unchanged.
Salary sacrifice allows employees to exchange a portion of their salary for pension contributions before tax and National Insurance are calculated, reducing NI liabilities for both workers and employers.
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Pension savers are set to lose part of their National Insurance (NI) advantages
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According to figures from HM Revenue & Customs (HMRC), around 7.7 million employees currently use salary sacrifice for pension contributions.
Of those, approximately 3.3 million contribute more than £2,000 per year and are likely to be directly affected once the cap comes into force.
Chris Eastwood, chief executive of Penfold, said: "Salary sacrifice has been a win-win for employers and employees for years... lowering National Insurance costs while strengthening retirement savings.
"Anyone contributing more than £2,000 a year through salary sacrifice will lose NI savings on the excess, and employers will see their NI costs rise accordingly."
He said an employee contributing £5,000 annually would lose NI savings on £3,000 once the new rules apply, reducing the overall efficiency of higher pension contributions.
Over time, those lost savings could accumulate into significant sums for regular contributors.
Employers are also expected to face higher National Insurance bills on contributions exceeding the cap and may need to adapt payroll systems and pension structures before the changes take effect.
Mr Eastwood said: "Businesses need to start modelling the financial impact now and ensure they communicate clearly with staff well ahead of implementation."
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The administrative impact of adjusting systems and contribution structures could prove substantial
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Companies offering enhanced pension arrangements or workforces with high levels of additional voluntary contributions are likely to be particularly affected by the reform.
The administrative impact of adjusting systems and contribution structures could prove substantial for some organisations.
Although the changes will not take effect until April 2029, advisers have warned that delaying planning could increase costs for both employers and employees.
Mr Eastwood said: "Businesses do still have a three-year window before the changes take effect.
The intervening period allows companies and staff to maximise existing National Insurance efficiencies
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"For employers not yet using salary sacrifice, there remains a significant opportunity to capture NI savings before 2029."
He said the intervening period allows companies and staff to maximise existing National Insurance efficiencies, reassess pension contribution strategies and review long-term retirement plans.
Higher earners and employees making additional voluntary contributions are expected to experience the greatest reduction in NI benefits once the £2,000 cap is introduced.
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