Why salary exchange still pays for employers
Good news for employers and their employees – although the Government has announced closer scrutiny of salary exchange (or salary sacrifice) - the planned changes for salary exchange in April 2029 will only affect the level of National Insurance (NI) savings, not the ability to use salary exchange itself.
This means salary exchange remains a valuable and effective benefit for both employers and employees. And for many employees, the changes will have little to no impact.
What the changes mean for employers
The 26 November 2025 budget proposed capping NI savings at £2,000 for salary exchange pension contributions. This doesn’t limit how much salary can be exchanged- it simply restricts the NI saving available for both employees and employers to the first £2,000 per employee. You can still use the salary exchange mechanism beyond this threshold. However, if you currently keep any NI savings generated through salary exchange, the introduction of the cap could increase your costs from 2029, as the NI savings will be limited.
On the other hand, if you add these savings into employees’ pension savings, employees will continue to benefit from the arrangement, but only for the first £2,000 exchanged.
Take a moment to review your current policy on NI redirection to stay ahead of these changes.
How employees will be affected
From April 2029, some employees exchanging more than £2,000 may see a reduction in NI savings, but those exchanging less than £2,000 won’t be impacted. The average full-time salary in the UK is around £35,000, and the standard employee automatic enrolment contribution of 5% means many employees’ salary exchange amounts will fall well within the new cap.
In fact, the Government’s own figures suggest that seventy-four per cent of basic rate taxpayers will be completely unaffected by the £2,000 cap.
Reducing employees adjusted net income can help them avoid tax traps, keep child benefit, and make the most of pension tax relief, all of which won’t be affected by the cap. Adjusted net income is total taxable income before any personal allowance less certain reliefs, such as pension contributions or gift aid.
Higher earners could still enjoy big benefits, as salary exchange allows them to receive the full marginal rate of tax relief directly into their pension fund without needing to claim back additional tax relief from HMRC.
Why salary exchange remains valuable
Salary exchange offers more than just NI savings. It can help employees in several ways:
- Helps employees avoid tax traps
- Allows them to keep child benefit
- Makes the most of pension tax relief at source
While the proposed changes may increase employer costs where NI savings are currently kept, the continued use of salary exchange after April 2029 is expected to improve pension outcomes for most employees and support long-term savings goals.
Keep an eye on your arrangement and talk openly with your staff to help everyone make the most of this valuable benefit.
Sources
Annual income – ONS - Average weekly earnings in Great Britain - Office for National Statistics