Anyone who gives up more than £2,000 a year of salary or bonus for pension contributions. The policy paper says most employees making typical contributions will not be affected, and that the cost of the relief falls disproportionately on contributions from people on higher incomes. Those most likely to exceed the cap include: higher earners sacrificing a percentage of a large salary; employees who sacrifice a bonus into their pension, since a single bonus can exceed £2,000 on its own; employees who sacrifice salary to keep their income below the thresholds for Tax Free Childcare or Child Benefit. The policy paper says they can carry on doing so, but contributions above £2,000 will attract National Insurance. Employers are affected as well, because employer contributions at 15% will be due on the excess. The policy paper says employees will not need to contact HMRC: employers will make the payroll changes.

Arrangements in place now keep their full National Insurance saving for every tax year up to and including 2028 to 2029. The first £2,000 a year of sacrifice remains free of National Insurance. Income Tax relief on pension contributions, and the annual allowance, are not changed by this Act. Employer pension contributions that are not funded by giving up salary remain free of National Insurance. The existing conditions for a valid salary sacrifice still apply, including that it must not take cash pay below the National Minimum Wage.

The £2,000 cap on NI free pension salary sacrifice

Q: How much more National Insurance could be due?

Illustration only. The rates and thresholds for 2029 to 2030 are not yet known, so these examples use 2026 to 2027 figures: employee contributions of 8% between £12,570 and £50,270 and 2% above, and employer contributions of 15% above £5,000. They also assume the cap is applied simply to the annual totals, which the regulations have yet to confirm. EmployeeSalary sacrificedExcess over £2,000Extra employee NIExtra employer NI Salary £30,000, sacrifices 5%£1,500NoneNoneNone Salary £35,000, sacrifices £3,000£3,000£1,000£80 at 8%£150 at 15% Salary £60,000, sacrifices £6,000£6,000£4,000£80 at 2%£600 at 15% The third employee's cash pay after the sacrifice is £54,000, which is already above the upper earnings limit, so the excess only attracts the 2% rate. The employer's extra cost in that case is much larger than the employee's. Income Tax relief on all three contributions is unchanged, as long as they stay within the pension annual allowance.

From 6 April 2029, only the first £2,000 a year of pension contributions made through salary sacrifice will be free of National Insurance. Salary given up above that will attract both employee and employer Class 1 contributions, although it will still be free of Income Tax within the usual pension limits. The change was announced at Budget 2025 and is now law under the National Insurance Contributions (Employer Pensions Contributions) Act 2026, with the detail to follow in regulations.

Tax investigation insurance from £108.75 a year (£9.06 a month).Pays up to £100,000 of your accountant's fees if HMRC opens an enquiry. No excess. Buy online in a few minutes.

See my price in 2 questions How the cover works Accountant? Offer cover to your clients or call 01795 841 310

How does pension salary sacrifice save National Insurance now?

In a salary sacrifice arrangement the employee agrees to a lower contractual salary and the employer pays the same amount into the employee’s pension. The employee’s own contribution becomes an employer contribution. HMRC’s guidance on salary sacrifice for employers lists payments into pension schemes among the few benefits that keep their tax advantages under salary sacrifice, and do not need to be valued or reported. Its own example is a £5,000 bonus given up for a £5,000 employer contribution to a registered pension scheme, which carries no employment income tax or National Insurance charge for the employee.

That is the attraction. An employee who pays into a pension from net pay gets Income Tax relief, but still pays National Insurance on the salary used. An employee who sacrifices the same salary pays neither, and the employer saves its 15% too. The general rules for these arrangements are in our guide to salary sacrifice and optional remuneration.

What changes from April 2029?

The government’s policy paper, published on 26 November 2025, says that from April 2029 only the first £2,000 of employee pension contributions through salary sacrifice each year will be exempt from National Insurance. The key points are:

Salary sacrifice for pensions can continue, including above £2,000.
Amounts above £2,000 will be subject to employer and employee National Insurance, in the same way as other employee workplace pension contributions.
Contributions through salary sacrifice will still be exempt from Income Tax, subject to the usual limits.
All employer pension contributions will continue to be free of National Insurance.
Employers will report the total amount sacrificed through their existing payroll software, and HMRC will publish further guidance before April 2029.

The last two points need reading together. An ordinary employer contribution that is not paid in exchange for giving up salary stays outside National Insurance. What changes is the treatment of the salary the employee gave up to fund it.

Worried about an HMRC check? Tax investigation insurance pays your accountant’s fees if HMRC opens an enquiry or compliance check. Solar Protect cover pays up to £100,000 with no excess. It never pays tax, interest or penalties.

From £108.75 a year (£9.06 a month) for individuals, £117.57 for sole traders and £207.50 for companies and partnerships, including IPT and the £20 admin fee.

See my price in 2 questions or call 01795 841 310.

★★★★★ Rated 4.9 out of 5 on Trustpilot from over 160 reviews

What does the 2026 Act actually do?

The National Insurance Contributions (Employer Pensions Contributions) Act 2026 received Royal Assent on 29 April 2026. Section 1 inserts new subsections (6A) to (6E) into section 4 of the Social Security Contributions and Benefits Act 1992, and section 2 makes the same change for Northern Ireland. In outline:

Where a pension contribution of a kind covered by section 308 or 308A of the Income Tax (Earnings and Pensions) Act 2003 is provided under optional remuneration arrangements, regulations may treat the amount foregone as earnings for National Insurance.
The regulations must leave out amounts that do not exceed the contributions limit for the tax year, and the first regulations must set that limit at £2,000.
The regulations may set equivalents for weekly or other pay periods, rounded up by not more than £1, and may decide when the amount is treated as paid.
The changes have effect for 2029 to 2030 and later tax years.
Regulations that reduce the limit are added to the list in section 176 of the 1992 Act, so a cut would need the approval of both Houses of Parliament.

Because the Act only covers pension contributions under sections 308 and 308A, other salary sacrifice benefits, such as an electric car through salary sacrifice, are not affected by this cap.

Who will it affect?

Anyone who gives up more than £2,000 a year of salary or bonus for pension contributions. The policy paper says most employees making typical contributions will not be affected, and that the cost of the relief falls disproportionately on contributions from people on higher incomes. Those most likely to exceed the cap include:

higher earners sacrificing a percentage of a large salary;
employees who sacrifice a bonus into their pension, since a single bonus can exceed £2,000 on its own;
employees who sacrifice salary to keep their income below the thresholds for Tax Free Childcare or Child Benefit. The policy paper says they can carry on doing so, but contributions above £2,000 will attract National Insurance.

Employers are affected as well, because employer contributions at 15% will be due on the excess. The policy paper says employees will not need to contact HMRC: employers will make the payroll changes.

How much more National Insurance could be due?

Illustration only. The rates and thresholds for 2029 to 2030 are not yet known, so these examples use 2026 to 2027 figures: employee contributions of 8% between £12,570 and £50,270 and 2% above, and employer contributions of 15% above £5,000. They also assume the cap is applied simply to the annual totals, which the regulations have yet to confirm.

Employee	Salary sacrificed	Excess over £2,000	Extra employee NI	Extra employer NI
Salary £30,000, sacrifices 5%	£1,500	None	None	None
Salary £35,000, sacrifices £3,000	£3,000	£1,000	£80 at 8%	£150 at 15%
Salary £60,000, sacrifices £6,000	£6,000	£4,000	£80 at 2%	£600 at 15%

The third employee’s cash pay after the sacrifice is £54,000, which is already above the upper earnings limit, so the excess only attracts the 2% rate. The employer’s extra cost in that case is much larger than the employee’s. Income Tax relief on all three contributions is unchanged, as long as they stay within the pension annual allowance.

What stays the same?

Arrangements in place now keep their full National Insurance saving for every tax year up to and including 2028 to 2029.
The first £2,000 a year of sacrifice remains free of National Insurance.
Income Tax relief on pension contributions, and the annual allowance, are not changed by this Act.
Employer pension contributions that are not funded by giving up salary remain free of National Insurance.
The existing conditions for a valid salary sacrifice still apply, including that it must not take cash pay below the National Minimum Wage.

What should employers and employees be doing now?

Nothing changes until 6 April 2029, and the regulations and HMRC guidance are still to come. The Act leaves the detail of how the annual limit is applied to each pay period to those regulations. Until they are published, the sensible steps are practical ones:

Employers can identify which employees sacrifice more than £2,000 a year and estimate the extra employer cost from 2029 to 2030.
Payroll teams can ask their software provider how it will report the total amount sacrificed.
Employees planning a large bonus sacrifice can note that the National Insurance saving on amounts over £2,000 ends after 5 April 2029.
Directors of their own companies should compare salary sacrifice with a straightforward employer contribution, which the policy paper says will remain free of National Insurance. Our guide to pension contributions for business owners covers the wider tax position.

What do people commonly get wrong about the cap?

Thinking pension tax relief is being capped. It is not: the cap only affects National Insurance.
Thinking salary sacrifice above £2,000 will be banned. It can continue, with National Insurance due on the excess.
Assuming the change applies now. It has effect from the 2029 to 2030 tax year.
Assuming all employer contributions will attract National Insurance. Only the salary given up above the limit is treated as earnings.
Assuming cycle to work or car schemes are capped too. The Act is limited to pension contributions.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.