Budget summary: this year’s changes explained

The budget announcement restricting the national insurance savings to the first two thousand pounds of pension contribution sacrificed, will potentially impact both employees and employers although it must be remembered these changes don’t take effect until April 2029.

Currently both employees and employers enjoy full National Insurance savings on any salary sacrificed into pensions. From April 2029, NI relief is capped at the first £2,000 per year of sacrificed salary. Anything above that will attract the usual NI rates—8% for employees up to £50,270, 2% above that, and 15% for employers.

Let’s first consider what this means for employees?
For anyone contributing more than £2,000 via salary sacrifice, they could see their pension contributions reduce as well as their take home pay reduce. I should point out here that the budget further information document states the £2,000 cap will shield 74% of Basic rate taxpayers from any changes.

For higher earners who are exchanging salary subject to 2% NI rather than 8%, the impact will be less pronounced, but will still be felt. Either through lower pension contribution if the Employee NI savings are redirected to the pension, or through lower take home pay where they aren’t.

And for employers?
There are a few points to consider. First, payroll costs will rise because employers pay NI on any sacrificed salary above £2,000. For example, if an employee sacrifices £10,000, the employer faces an extra £1,200 in NI. Second, there’s an administrative burden—systems need updating, and staff need clear communication, although the April 2029 deadline will ease some of the strain on this.

The impact of the salary sacrifice changes on employers will differ depending on what the employer currently does with their NI savings.

For those employers who redirect their NI savings to the employees pension, the ability to fund extra pension contributions from NI savings will be lost above the first £2,000 of salary sacrificed. This will likely see a reduction in the overall pension contribution.

On the other hand, employers who have historically kept the NI savings for themselves will feel this cost increase, but their employees’ pension contributions won’t change.

On a more positive note, it’s important to remember that salary exchange hasn’t been limited to £2,000, it’s only the national insurance savings that have been limited to the first £2,000 sacrificed. This is an important distinction, particularly for higher and additional rate taxpayers, as using salary sacrifice is still an effective means of getting higher and additional rate tax relief immediately, rather than needing to reclaim it from HMRC. It’s also important to remember that employees who choose to sacrifice salary to receive Tax Free Childcare or Child Benefit can keep doing so.

So what should businesses do?
First, model the financial impact quickly. Second, decide what adjustments, if any, are needed to their salary sacrifice model. And third, communicate clearly—employees will want to understand why their take-home pay and pension projections will change.

In other points of interest for employers, the Minimum wage and living wage both increase from April 2026. The minimum wage will rise to £10.85 and the living wage to £12.71.

And finally for those employers who are also business owners and take some of their remuneration as dividends. The basic and higher rate of dividend tax will both increase by 2% from April 2026.The additional rate for dividends will remain unchanged.

Please revisit this site over the coming months for further information as it becomes available, thank you.