The Chancellor has just announced in the Autumn Budget that, as part of measures to increase revenue, the amount an employee can contribute to their pension scheme under a salary sacrifice arrangement will be, in effect, capped at £2,000. Any pension contributions above this £2,000 limit will no longer benefit from tax and National Insurance savings.

Since the introduction of automatic enrolment in 2012, there has been a real push to encourage the country’s workforce to be more financially prepared for their retirement, and research shows that the percentage of eligible workers saving for retirement has risen from 55% in 2012, to 88% in 2025. With such positive momentum since 2012, there is a worry across the pensions industry that these reforms will demotivate savers and put more pressure on employers.

Salary sacrifice is an arrangement between an employer and employee to reduce the employee’s entitlement to pay in return for a non-cash benefit such as, in the case of pensions, increased employer pension contributions. Salary sacrifice arrangements are well known for being a tax-efficient method of making pension contributions as it reduces the amount of National Insurance contributions paid by both the employer and employee.

By capping the amount of pension contributions that can receive tax relief to just £2,000 per year, the impact on both employers and employees will be significant. For employees, an increase in National Insurance contributions will be the main impact, with any contributions over the £2,000 limit having National Insurance applied at 8% for earnings under £50,270 and 2% for earnings over this amount. Employees earning between £100,000 and £125,000 are likely to be heavily impacted under this reform as it is a well-used method of keeping those earners under the threshold for the 60% marginal tax rate.

Employers will also see a rise in their National Insurance contributions as, under the old salary sacrifice rules, employers were able to claim relief on all contributions made to a pension scheme using this method. Given that employers have faced a hike in National Insurance rates from April 2025, the cap on pension contributions under a salary sacrifice arrangement is likely to lead to a lot of smaller employers facing additional pressures from rising costs.

According to accountancy firm RSM, in real terms the cap of £2,000 would mean that an employee with an annual salary of £45,000 and who contributes 5% of salary into their pension scheme would have to pay £30 more in National Insurance, and their employer would pay £34 more. Similarly, someone earning £125,000 who saves £25,000 of their salary into their workplace pension would pay £460 more in National Insurance, and their employer would have to pay £3,450. 

An even bigger issue for employers might be the incentive to attract and retain key talent. In recent years, employees have increasingly seen benefit and reward packages as an important asset, and the ability to use salary sacrifice to maximise pension contributions and take-home pay has always been an attractive aspect. Employers need to stay informed and take professional advice, where necessary, to ensure they are properly prepared to navigate the reforms in the Budget.