Employee Pension Contributions And Salary Sacrifice Arrangements: Restriction Of National Insurance Exemption

At A Glance

• The National Insurance Contributions (Employer Pensions Contributions) Act 2026 has received Royal Assent.
• The Act gives the UK government power to limit the National Insurance contributions exemption that currently applies to employee pension contributions made using a salary sacrifice arrangement. The government intends to limit the exemption to the first £2,000 of employee pension contributions per annum from April 2029.
• Employers who operate salary sacrifice arrangements will need to consider whether it will remain cost-effective to do so once the limit comes into effect.

The National Insurance Contributions (Employer Pensions Contributions) Act 2026 (the Act) received Royal Assent in April 2026. It follows the government’s announcement in the 2025 Autumn Budget that it planned to restrict the extent to which employee pension contributions made via salary sacrifice arrangements benefit from a National Insurance Contributions (NICs) exemption.

Currently, in common with other benefits provided using salary sacrifice, employee pension contributions made via a salary sacrifice arrangement are exempt from both employee and employer NICs.

The Act gives the government power to make regulations imposing a limit on this exemption, and requires the first such limit to be £2,000 per annum. Any contributions over this threshold will become subject to NICs. The NICs exemption for employer pension contributions and for other employee benefits provided via salary sacrifice will remain unchanged.

What Does This Mean for Employers?

While estimates vary, it is generally accepted that the majority of UK employers operate a salary sacrifice arrangement for employee pension contributions, and the Act does not prevent them from continuing to do so. However, employers will need to consider several practical issues when deciding how to respond.

• Increased costs: The most immediate consequence is that employers will lose the NICs saving (currently 13.8%) on employee pension contributions made via salary sacrifice. For employers with large workforces participating in such arrangements, this represents a material increase in employment costs.

  Employers will need to consider whether salary sacrifice for employee pension contributions remains cost-effective compared with the traditional payroll deduction method of contribution. The relative attractiveness of salary sacrifice has historically rested on the NICs saving; once that advantage is limited, the administrative burden of operating salary sacrifice may no longer be justifiable.

• Administrative complexity: The need to put in place additional payroll processes to flag where an employee’s contributions have exceeded the £2,000 limit may make the continued operation of salary sacrifice less attractive.
• Contribution structures: Employers will need to consider whether to absorb the additional NICs cost, or restructure contribution arrangements to pass that cost on to employees. Any changes to contribution structures must continue to satisfy the employer's minimum contribution obligations under the automatic enrolment regime.
• Contractual and consultation obligations: Where salary sacrifice arrangements and/or contribution structures are embedded in employment contracts, any change is likely to require employee consent. Consultation obligations may also arise.
• Communication and employee relations: Employees whose annual pension contributions via salary sacrifice exceed £2,000 will see a reduction in the value of their overall package if employers pass on the increased NICs cost or revert to traditional contribution methods. This is on top of the increased NICs cost that the employees themselves will have to pay on their contributions. Clear and timely communication will be essential to manage expectations and maintain good workforce relations.

Looking Ahead

The April 2029 implementation date may seem some way off. However, the issues outlined above mean that early planning will be essential. Employers should start considering what they intend to do in response to the changes now to ensure a smooth transition when the changes take effect.