What could happen to salary sacrifice and why it matters

As the Budget approaches, salary sacrifice has been making headlines again.

This scheme allows employees to give up part of their salary in exchange for benefits, usually employer pension contributions, with both employees and employers saving on National Insurance.

Rumours suggest the government may cap the NI relief on salary-sacrifice pension contributions at around £2,000 per year.

For employers, HR teams, payroll professionals, and employees alike, this could affect how schemes are structured, how contributions are communicated, and ultimately, how much people take home.

Salary sacrifice has become a popular way to save for retirement because it reduces taxable salary, lowering both income tax and National Insurance contributions.

Employers benefit too, saving on NI while offering pensions that help attract and retain staff.

The scheme is especially useful for employees near higher tax thresholds or those wanting to contribute above the minimum required by automatic enrolment.

Because contributions are taken before tax, it often provides more retirement savings for less cost than paying from net income.

The proposed cap could mean any contributions above £2,000 lose the NI advantage.

This might affect take-home pay for employees making larger contributions and increase payroll costs for employers.

Currently, salary sacrifice arrangements cost the Treasury around £4.1 billion annually in lost National Insurance, so a cap could raise approximately £2 billion.

Key effects to consider include:

• Employees making large pension contributions may see reduced take-home pay
• Employers could face higher payroll costs and may need to adjust agreements
• Staff may require clear communication to understand changes and maintain confidence
• Some benefits, like statutory payments or life cover linked to salary, could be affected

The best approach is to review and prepare rather than panic.

Employers should:

• Identify who uses salary sacrifice and typical contribution levels
• Model the financial impact of a potential cap on payroll costs and employee benefits
• Update payroll and benefits systems if needed
• Communicate clearly with employees to prevent confusion and support confidence in pension savings

Employees can also take steps to prepare:

• Check current contributions and whether any exceed the potential £2,000 cap
• Speak with HR or payroll about potential changes
• Consider the impact on tax, statutory benefits and long-term financial goals
• Avoid making immediate changes until official confirmation is provided

Salary sacrifice is more than just a tax-saving tool.

A strong pension offering demonstrates that employers care about employees’ financial security.

Uncertainty or sudden changes can cause stress and affect confidence, while thoughtful planning and communication can boost morale and engagement.

Preparing now helps employees feel informed and supported while keeping financial wellbeing a priority.