The Autumn Budget | Just when Britain needs…

Budget 2025: Just when Britain needs people saving more, not less

How the new £2,000 salary-sacrifice cap may impact on how much people save.

This year’s Budget began long before Rachel Reeves reached the Dispatch Box and in an unprecedented twist, the Office for Budget Responsibility (OBR) released key fiscal details ahead of the speech, turning the usual theatre of Budget Day into something closer to pantomime. Employers, journalists and policy teams were reacting to tax measures and pension reforms before they had even been formally announced, and among those early revelations was the headline change impacting pensions: a £2,000 cap on tax relief for salary-sacrifice pension contributions from April 2029.

For years, salary sacrifice has been the quiet workhorse of UK pension saving, not glamorous, not even widely understood by participating pension savers, but reliably helping millions put more away for later life and in turn saving employers and employees on national insurance contributions.

Now, with the 2025 Budget confirming a £2,000 cap from April 2029, the government has decided to ‘fix’ one of the few parts of the pension system that wasn’t actually broken.

But perhaps the bigger story isn’t what’s being lost – it’s what this moment could prompt employers to rethink.

How salary sacrifice works

Salary sacrifice works by allowing an employee to exchange a portion of their salary for an employer pension contribution. Their contractual pay reduces, and the employer redirects the sacrificed amount straight into the pension. Because the employee’s official salary is lower, both income tax and National Insurance fall, and the employer also benefits from reduced NI. In many organisations, some of the employer’s NI saving is reinvested back into the pension plan, meaning the employee receives an even higher contribution than they would have through standard payroll deductions.

What is changing?

From April 2029, only the first £2,000 of pension contributions made through salary sacrifice will qualify for National Insurance relief. Any sacrificed salary above that figure will attract full employee and employer NI. Currently there is no cap on the amount that can be sacrificed, bar ensuring an employees ‘pay’ does not drop below minimum wage.

For employers, the implications will be immediate:

• The cost-efficiency of higher employee contributions diminishes
• Matching and reward structures may become more expensive
• Payroll processes, software and communication strategies will need updating

A system pulling in two directions?

What makes the change striking is how it contrasts with the wider ambitions of the Pension Schemes Bill launched in June of this year.

Many of the Bill’s reforms push firmly in the right direction by aiming to improve value-for-money. The salary sacrifice cap, however, sits uncomfortably alongside that progress.

Employees contributing above the minimum, often the individuals working hardest to fund a secure retirement, may feel the financial impact in their pay and adjust contributions downwards. Employers could also reconsider contribution levels as their NI costs rise.

Due to the quirks of the national insurance system for employees, lower earners and those saving only the auto-enrolment minimum will see very little difference.

But for employees contributing more, the cap introduces a new friction at the precise moment when the country needs higher saving, not lower.

An additional pressure on employers and committed savers?

The change also has a wider economic consequence. By restricting salary sacrifice, the government has effectively added another National Insurance cost (following the increase from 13.8% to 15% in April of this year) for employers at a time when private sector employers are already managing wage inflation, higher benefits costs and tight labour markets.

For employees who are trying to do the right thing by saving efficiently and contributing more than the minimums, the measure feels like a penalty for positive financial behaviour.

And for employers who contribute above the statutory minimum, especially those offering generous matching schemes, the increased NI burden may force a reassessment of contribution levels or other employee benefits.

The net result could be reduced take-home pay, reduced employer generosity, or both – unless organisations plan and communicate proactively.

The behavioural challenge: it won’t feel like a tax until people experience it

Salary sacrifice is misunderstood even in well-informed workforces. Employees typically notice only the outcome of better take-home pay or stronger employer contributions, rather than the mechanism itself.

Once the new cap takes effect:

• Employees contributing above £2,000 may see a reduction in take home pay and even pension contributions (if employers pass back their national insurance saving to employees)
• Some may reduce contributions without understanding the long-term implications
• Employers will need to manage expectations and explain the change clearly and carefully

This is where communication will make the biggest difference.

In summary the £2,000 salary-sacrifice cap represents a significant shift in how pension saving is encouraged.

It removes part of the efficiency that has helped millions save more effectively, and it arrives at a moment when the UK urgently needs stronger private pension saving to ease the pressure on the State Pension.

But it also provides employers with a chance to re-evaluate scheme design, strengthen communication, and double down on the principle that matters most: consistent, long-term saving is still the most powerful lever for securing retirement outcomes.

Handled well, this change does not have to reduce engagement – it can spark a more meaningful conversation about how to help employees save for the future.

We will all be keeping our eyes peeled for more news as to how this will be implemented in 2029.