Salary Sacrifice Changes: What Should Employers Be Doing?

Introduction

Last year’s Autumn budget announced a number of significant reforms in the UK pensions landscape, one of which is the proposal for only the first £2,000 of employee contributions made through salary sacrifice to be exempt from employee and employer National Insurance contributions (“NICs”). This represents a major shift away from the existing, long-standing position.  

Salary sacrifice is where an employee who is a member of a pension arrangement can “sacrifice” a portion of their salary in exchange for higher employer contributions.  As employer pension contributions are exempt from NICs, this benefits both employers and employees who would both be required to pay NICs if that amount was paid as salary. 

Currently, pension contributions made via salary sacrifice are fully exempt from employee and employer NICs, making it an attractive and tax efficient option for both employees and employers. The use of salary sacrifice for paying pension contributions is used widely and so this change will impact many employers. 

What should employers be doing? 

Whilst the change is not due to take effect until 6 April 2029, employers across the UK will need to plan early to understand the financial, operational and workforce consequences of the new cap. 

1. Assessing cost increases

Assuming the changes take effect as proposed and are not further altered beforehand, from April 2029 employers will pay employer NICs on any portion of a sacrificed contribution that exceeds £2,000. This significantly reduces the financial incentive previously associated with salary sacrifice.

Higher payroll costs will particularly apply among employers with large populations of high earners or those operating generous DC schemes.

It is also important to note that even though the cap has been provisionally set at £2,000, the proposed bill (which is currently making its way through Parliament) includes a mechanism for amending the cap – meaning that this amount could potentially be reduced even further in future years, thereby increasing costs further for employers. 

Employers should review their specific workforces to better understand the financial impact of the changes and determine if they may need to revisit their pension contributions formulae (especially if they are currently passing on any NICs savings to employees). 

2. Updating systems to meet compliance and reporting requirements

From an operational standpoint, employers will need to update their payroll software to accurately record contributions made above the £2,000 cap. This is likely to result in additional costs incurred with implementing new software where needed and on training payroll and HR teams on new monitoring duties and system changes.    

There may also be additional reporting requirements which employers will need to comply with. HMRC have indicated that they may require additional reporting to be done directly to them and will engage with employers and the industry in advance of April 2029 to produce guidance on this. 

Given the longer lead times often required for payroll configuration, employers should start reviewing their systems well in advance.

3. Reviewing their employee remuneration package

The £2k cap changes the economics of pension salary sacrifice. The key issue is economic incidence: will the employer absorb the additional employer NIC cost above the cap, share it (e.g. reduce employer contributions), or pass it through via overall pay outcomes? That choice will drive retention risk and reward competitiveness - especially for higher earners and workforces with high salary sacrifice take-up.

Employers should therefore treat this as a total reward decision, not a payroll tweak. A pragmatic approach is to segment the population (e.g. executives/key talent vs wider workforce) and use targeted levers rather than blunt cash top-ups, which typically reintroduce PAYE/NIC leakage and can materially increase the cost of keeping employees “whole”.

Incentives-led strategies to pressure-test:

• Broad-based share plans (e.g. SIP/SAYE) to preserve engagement and long-term alignment without turning value into taxable cash.
• Targeted retention / deferral for key roles (retention awards, deferred bonus mechanics, co-investment style arrangements where relevant).
• Reward mix reset (fixed/variable/benefits), including whether to re-base pension design or introduce tightly scoped allowances.
• Communications and financial education, to avoid this being perceived as an employer “take-back” rather than a legislative-driven redesign.
• Contract and plan coordination: check interaction with bonus, commission and share plan definitions (e.g. “pensionable salary”, “base salary”, contribution formulas, auto-enrolment certification) so changes do not create unintended knock-on effects or inequities.

Done well, this becomes a controlled redesign rather than a reactive cut. 

Employers should move early - quantify exposure, set a clear incidence position, segment the workforce and deploy the right mix of incentives - to protect retention and credibility without sleepwalking into higher costs, payroll friction and employee distrust.

4. Reviewing their scheme rules and employment contracts 

Employers will need to review their pension scheme rules to determine whether contribution reductions or restructuring require an amendment to the rules and, in trust-based arrangements, whether trustee consent is needed.  Employers will also need to follow statutory consultation requirements where applicable and this should be factored into the timetable for changes.   

Similarly, employers will also need to consider such reduction in the context of existing contractual arrangements with employees to understand what changes, if any, to pension contributions and employee benefits can be made and whether employee consent is required to proposed changes. 

New legislation due to be implemented in January 2027 will make it more difficult for employers to enforce contract change without employee consent.  So, if contract changes are required, it will be advisable to propose them as part of a wider review of the EVP.  

Employers should seek legal advice on their options to amend reward and benefit structures and to understand the legal and regulatory processes that must be followed to ensure that any changes are valid and binding.

Next steps for employers

With over three years to prepare, employers should take proactive steps now to understand the implications of the change and ensure a smooth transition. Early planning, clear communication and thoughtful reward strategy realignment will be essential.  Employers that move early may be best placed to navigate the transition without damaging the trust and confidence of their employees.

Burges Salmon has a combination of pensions, employment and incentives expertise.  This article has been written by Kelly Beattie (Senior Associate, Pensions and Lifetime Savings) with input from Nigel Watson (Partner, Incentives) and Annelise Tracy Phillips (Senior Associate, Employment).  If you would like to discuss any of the points covered further, please contact either Kelly or your usual contact at Burges Salmon.