The £2,000 cap on National Insurance-free salary sacrifice pension contributions has been framed as a measure targeting high earners.
However, in practice, the burden falls heavily on small and medium-sized businesses and the staff they employ – especially the so called “squeezed middle”.
What is changing?
From April 2029, salary sacrifice tax relief will remain available, but only the first £2,000 of employee pension contributions each year will be exempt from National Insurance.
Anything above that threshold will attract NI for both the employee and the employer.
The direct cost to employers
Many employers currently pass on a portion of their own NI savings to staff by topping up pension contributions, which is a widely used mechanism that helps make salary sacrifice arrangements genuinely attractive.
From April 2029, a new 15 per cent employer NI charge will apply to contributions above the cap, making those top-ups considerably harder to justify for many firms.
For businesses that can no longer sustain them, staff could see the overall efficiency of pension saving above the cap fall by as much as 23 per cent once lost employer contributions are factored in.
The ripple effects extend further still and the Office for Budget Responsibility estimates that around 76 per cent of higher employer costs are eventually absorbed through weaker pay growth and reduced benefits.
Many believe that the impact on staff is unlikely to be limited to pension savings alone.
Why smaller businesses are most exposed
Larger employers may have the resource and flexibility to absorb the additional costs or restructure reward packages accordingly.
For smaller firms, particularly those employing significant numbers of middle-income staff, the new charge arrives on top of the employer NI rate increase that took effect in April 2025 and will require careful management of the employment costs.
Act before April 2029
The April 2029 implementation date allows time to plan, but that window should not be taken for granted.
Reviewing existing salary sacrifice arrangements now, before the rules change, gives employers the best opportunity to restructure pension provisions in a way that balances cost with staff retention and reward.
To discuss what the salary sacrifice cap means for your business, please get in touch with our team.
