One of the big announcements of the 2025 Budget saw the government limit the national insurance contribution (NIC) savings that can be realised via salary sacrifice pension arrangements. This change, effective from 6 April 2029, will see NIC relief capped annually to the first £2,000 of employee contributions made through such schemes; amounts sacrificed above this threshold will be subject to class one employee and employer NIC. Income tax relief for pension contributions remains unchanged.
The new rules will also affect the relative attractiveness of bonus waiver schemes. Currently, bonus waivers enable employees to forego discretionary cash awards in return for employer pension contributions, in a similar manner to traditional pension salary sacrifice arrangements. This practice can generate substantial NIC savings, with employees potentially saving up to 8% or 2% NICs and employers 15%, depending on earnings bands.
Under the proposed changes, only the first £2,000 annually will retain NIC relief, and any excess sacrificed bonus will attract both employee and employer NICs, reducing the efficiency of these arrangements.
As many bonus waivers exceed this level, or individuals are otherwise already utilising the cap via a pension salary sacrifice scheme, the reforms are likely to reduce employer savings and diminish the attractiveness of salary sacrifice as a planning tool for high earners, particularly where remuneration is heavily bonus-driven.
So what can employers do? Ahead of 2029, many employers may review bonus deferral policies and contractual terms to optimise current relief while it remains available.
After the changes, salary sacrifice and bonus waiver structures will remain possible and tax-efficient. However, the reforms are likely to narrow their advantages significantly, prompting employers to revisit remuneration design and long-term reward strategies well ahead of the 2029 implementation date. As a result, some organisations may explore alternative reward mechanisms, including increased employer pension contributions funded outside salary sacrifice, or higher salary to bonus ratios.
In the meantime, employers should start thinking about their options now and to carefully model their proposals to assess the cost and impact.
Liam Condron is a director at PKF Littlejohn
