Autumn Budget 2025

Whilst other facets of pensions taxation (including leaving the 25% tax-free lump sum alone and general tax relief on contributions) appear to have been left unscathed, the salary sacrifice change represents a significant shift in pension policy, predicted to raise £4.7 billion in the first year of implementation.

Impact on Employees

The changes will affect employees differently depending on their contribution levels. Most lower-earning employees making typical pension contributions will remain unaffected by the £2,000 exemption threshold. However, higher earners who contribute larger amounts through salary sacrifice will face additional costs.

For example, an employee earning £60,000 annually and contributing 5% (£3,000) via salary sacrifice will pay an additional £20 per year in NICs on the £1,000 above the cap. While this may seem modest at the individual level, the cumulative effect across the workforce could be substantial.

Employees retain full flexibility to contribute as much as they wish to their pensions, including via salary sacrifice. All contributions will continue to receive Income Tax relief subject to existing limits. The change only affects NICs treatment for amounts exceeding £2,000. Notably, employees using salary sacrifice to access Tax-Free Childcare or Child Benefit are expected to be able to continue doing so, though pension contributions above £2,000 will incur NICs.

The administrative burden on employees is minimal, as employers will handle the necessary payroll adjustments to apply NICs to contributions above the threshold. However, the broader concern is the potential long-term impact on retirement readiness if the changes discourage higher pension saving.

Impact on Employers

Financial

Employers face more significant financial implications. Using the same example of a £60,000 earner contributing 5%, the employer will pay an additional £150 annually in employer NICs. This NIC rate creates a disproportionate cost burden compared to the employee’s additional contribution.

We have already seen employers say that higher NIC rates introduced in April 2025 are stifling wage growth and employment rates, with sectors such as hospitality being further impacted due to continuing increases in National Minimum Wage, also set to rise in April 2027.

This additional cost, left unmitigated, is likely to also have a negative effect on wages and productivity, as well as harming individuals’ ability to retire comfortably. This could lead to an ageing workforce who may represent extra payroll cost for employers.

Administrative

Luckily, there is plenty of time for employers to work with their payrolls as to how the new rules will be implemented. It is likely that two separate line items will be needed to report employee salary sacrifice contributions: one for the £2,000 capped limit which is both tax- and NIC-efficient, and one for the excess, which is only tax-efficient.

Unintended consequences?

The policy announcement appears to leave genuine employer contributions to pensions untouched – i.e. tax-free (to limits) and NIC-free.

If you are asking yourself, “Won’t employers just negotiate lower salaries – particularly easy for new hires – in return for higher employer contributions?”, then you are not alone.

It is as yet unclear as to what anti-avoidance measures the Government could introduce specifically around pensions, but it is likely that Optional Remuneration Arrangements (OpRA) rules will be invoked to prevent negotiation or choice.

I can see two potential routes here:

1. Employers change the overall structure of their employment offers to try to retain the NIC saving – in which case the Treasury does not reap the revenues they are projecting; or
2. Employers change their reward behaviours more broadly, stifling genuine earnings growth and productivity – which we have already seen as a result of the Employer NIC increase in April 2025

Either scenario (or a blend of the two) is negative for the economy, whilst also fuelling worries that today’s workforce are not saving enough for their retirement.

Next Steps

Both employers and employees should begin planning for these changes now, reviewing existing salary sacrifice arrangements and considering alternative pension contribution strategies to optimise tax efficiency from April 2029 onwards.

Would you like to know more?

If you’d like to discuss the above, please speak to your usual Blick Rothenberg contact or Tomm using the form below.