This will align the tax benefit of salary sacrifice schemes above the threshold with other workplace and personal pension schemes.

What does this mean for employers?

While employer pension contributions can still be made tax-free, an additional employer NICs cost will apply to salary sacrifice amounts exceeding the £2,000 threshold. In addition to the NICs cost, employers will also face additional compliance costs, as updates to payroll software will be required.

We don’t yet have any detail about how the NIC saving on the first £2,000 of contributions will be administered (which is unsurprising given we have nearly three and a half years until the rule change applies), but this may through a mechanism similar to the Apprenticeship Levy allowance.

What does this mean for employees?

Income tax relief is unaffected, and employees can still use pensions to stay below tax “cliff-edge” thresholds such as the High-Income Child Benefit Charge (applicable to taxable income over £50,000) and the personal allowance taper (which applies when taxable income exceeds £100,000).

Other salary sacrifice arrangements, such as Tax Free Childcare and Child Benefit, are unaffected.

Practical examples

Example 1: salary sacrifice

Employee A earns £80,000 per year and sacrifices 5% of their salary, with a 5% employer match. The employer therefore contributes a gross amount of £8,000 into the scheme each year.

The £4,000 of employer contributions is unaffected.

The employee is still eligible for income tax relief on the £4,000 they sacrifice. However, from 6 April 2029, based on current marginal rates, the new legislation will result in an additional £40 employee NIC and £300 employer NIC.

Example 2: paying a bonus in to a pension

If that same Employee A received a £10,000 commission payment and opted to have this paid into their pension as a lump sum, the entire amount would be subject to NICs from April 2029 (as the employee has used their full £2,000 allowance using their salary).

Based on current marginal rates this would result in an additional £200 employee NIC and £1,500 employer NIC.

Example 3: directing a termination payment into a pension

It is not uncommon for it to be agreed that a termination payment is paid directly into a departing employee’s pension – this often works well for both parties, as it saves income tax and employee NICs for the employee, and employer NICs for the employer.

There is a specific legislative exemption that excludes payments to registered pension schemes from the scope of the termination provisions. However, this exemption does not apply to general earnings that are only tax-efficient due to salary sacrifice. Consequently, the new rules will often reduce the effectiveness of this type of planning for NICs relief. As this is a complex area of law, advice should be sought on a case-by-case basis.