What will the £2,000 national insurance relief cap mean for employers?

In the Autumn Budget 2025, UK Chancellor of the Exchequer Rachel Reeves sought to shore up the nation’s future fiscal security by announcing measures designed to increase the government’s tax take. One measure was a change to make salary sacrifice less tax efficient.

As a result, the amount of employee pension contributions made using salary sacrifice which are exempt from national insurance (NI) contributions will be capped at £2,000 per year from April 2029.

Salary sacrifice is a tool to help people boost their long-term savings with the help of their employer. An employee agrees to reduce their gross salary or defer a bonus, with their employer paying the money into their pension instead.

The tool has been embraced by employers and employees alike, with 7.7 million employees currently using it, according to an HM Revenue and Customs (HMRC) policy paper from December 2025.

Criticisms of the measures

Many observers in the UK pensions industry have criticised the government’s decision, arguing it disincentivises a key behaviour it should encourage: saving for the future.

As Roberto Marrocco, policy adviser, long-term savings, at the Association of British Insurers (ABI), observes: “The Department for Work and Pensions’ own data shows millions of people are currently under saving for their retirement. Government policy should focus on helping people to save more, but this is likely to have the opposite effect.

“Research we conducted before the Budget showed that both employers and employees would save less into pensions if a cap was to be introduced. This double whammy on savings puts us at risk of an even greater retirement crisis, with many people ending up with less money than they expected when they retire.”

Chris Eastwood, chief executive officer (CEO) of pension provider Penfold, agrees with Marrocco, adding: “The mechanical impact for many people is fairly modest, but incentives matter. Salary sacrifice has been one of the simplest ways to make pension saving feel immediately rewarding through higher net pay. Reducing that reward at the margin risks nudging some employees, especially those who are less engaged with pensions, to trim contributions, which could compound into lower retirement outcomes over time.”

That said, it is important to note that Reeves could have gone much further. As Jamie Jenkins, director of policy for pension provider Royal London, says: “While unwelcome, restricting salary sacrifice is perhaps the least worst outcome for pensions. Those being enrolled into a workplace pension will continue to benefit from full income tax relief and mandatory pension contributions. And for now at least, 25% tax-free cash. Amidst all the noise, let’s not lose sight of that.”

What will the cap mean for employers?

In short, three ‘Cs’: change, cost and complexity. As the details of the changes emerge, employers’ attention will turn to implementation, which will create further operational complexity.

Many employers expect the impact to be significant. Only 7% of employers see the changes as having minimal or no business impact, with 20% of employers polled saying they expect the reforms to have a major impact on their business, in a poll of 140 of consultancy Hymans Robertson’s corporate clients from 1 December 2025.

Hymans Roberson’s data from November 2025 shows the impact of the salary sacrifice changes on three employers: for medium-sized white-collar firms, such as a 1,000-person professional services organisation with strong pension provision and average salaries of £67,000, employer costs could rise by around £830,000, a 1% increase in total employment costs.

Large blue-collar firms, for example, a 10,000-person manufacturer or energy organisation with good pensions and average salaries of £43,000 could see employer costs rise by £1.4m, a 0.3% increase.

For extra large retailers or hospitality firms, such as a 90,000-person supermarket chain with modest pensions and median salaries of £33,000, employer costs could rise by £1.5m, a 0.04% increase.

Employers will be seeking to offset the effect of the salary sacrifice loss, says Mark Jones, employee benefits partner at consultancy Isio. “We need to see the detail around implementation but, for employers where a significant proportion of the workforce are making use of salary sacrifice above the £2,000 level, they are going to look for ways to mitigate any additional costs,” he explains.

“That may include changing their scheme, so they don’t pay more than £2,000 in salary sacrificed contributions or changing the balance of remuneration with higher pay rises making up for reduced contributions.”

Use of NI savings

Employers will also need to consider the impact of the change in terms of benefits provision if they have been using the NI savings from salary sacrifice to fund other benefits and reward schemes. “That pool of savings is likely to shrink for workforces with meaningful numbers sacrificing above £2,000,” explains Eastwood.

“That creates a practical decision for employers: whether to protect pension enhancement first or spread reduced NI savings across multiple benefits. Either way, it reinforces the need to plan ahead and avoid letting a technical tax change unintentionally weaken employee retirement saving outcomes.”

It may sound daunting, but in the short term, employers should keep calm and carry on, because there is plenty of time to plan. Stuart Reid, distribution director at People’s Pension, says: “The changes to pensions salary sacrifice announced in the Budget might feel substantial but employers shouldn’t panic, yet.

“They won’t take effect until 2029 and there’s no immediate action for employers to take until details become clearer, and nothing that will change for employees utilising salary exchange for the next few years.”

What will it mean for employees?

Experts fear that the changes will erode public trust in pensions. Almost one in five consumers are very concerned about the changes, rising to 33% among those who earn more than £70k, according to research by Standard Life in December 2025.

Mike Ambery, retirement savings director at Standard Life, part of Phoenix Group, said: “Salary sacrifice has been one of the most reliable tools for helping people make every pound of their savings go further. Changing it now risks making saving feel harder at a time when most people are already under-saving for retirement.

“Combine that with frozen tax bands quietly pushing more people into higher rates of tax, and the sense of financial pressure only grows. If the system becomes more complicated and less rewarding, people may lose trust in pensions; which is a risk none of us can afford.”

That said, the most significant costs will fall on employers, as outlined above. An employee working for a large retailer contributing £6,000 could see take-home pay fall by around £80, while someone contributing £10,000 could lose £160, according to modelling by Hymans Robertson.

Higher earners could reduce their contributions to fall under the £2,000 NI cap, says Eastwood. “It’s a realistic possibility. Some higher earners are likely to optimise around the £2,000 NI-free level, particularly if the NI saving has been a key driver of their contribution behaviour. The policy is also designed to limit relief that disproportionately benefits higher contributors.”

That said,  David Robbins, senior consultant at WTW, adds: “There are still plenty of good reasons for higher earners to save into a pension.” For people earning £100,000-125,000, paying into a pension remains a valuable way to retain their personal allowance and claim tax-free childcare.

All in all, the industry broadly agrees that disincentivising pension saving does not send the right message, and employers will have some work to do to prepare for the changes. Thankfully though, there is plenty of time to get ready, and the reforms could have been much more significant.