Guidance

Salary sacrifice reform for pension contributions

Published 4 December 2025

Who is likely to be affected

Employers and employees who operate or participate in Optional Remuneration Arrangements (OpRA) for pension contributions, more commonly known as ‘salary sacrifice’ or ‘salary or bonus exchange’ for pensions contributions.

General description of the measure

Salary sacrifice is a contractual arrangement between an employee and their employer involving a reduction of an employee’s gross earnings in return for a benefit (in this case an additional employer pension contribution on their behalf). Salary sacrifice can allow employees and employers to pay less payroll taxes than they otherwise would have done had they not entered into these arrangements.

This measure removes the OpRA excluded exemption for employer pension contributions for Class 1 National Insurance contributions only, where salary sacrifice arrangements exceed the £2,000 contribution limit. As a result, any salary sacrificed for pensions above this limit will attract Class 1 primary National Insurance contributions for employees and Class 1 secondary National Insurance contributions for employers on the relevant amount.

The Income Tax relief on employee and employer pension contributions and National Insurance contributions relief on traditional (non-salary sacrifice) employer pension contributions remain unchanged.

Policy objective

The government supports and incentivises pension saving and has retained income tax and National Insurance contributions reliefs on pensions contributions that are worth over £70 billion per year.

Salary sacrifice allows some employers and employees to pay less Class 1 National Insurance contributions by exchanging part of an employee’s pay for pension contributions from their employer. However, this is only available where it is offered by employers, and not everyone can use it. For example, it is not allowed if it means an employee’s pay would fall below the National Minimum Wage.

Most other salary sacrifice opportunities were closed in 2017. Salary sacrifice for pensions contributions remains, and its cost as a relief has increased markedly from £2.8 billion in forgone National Insurance contributions in tax year 2016 to 2017, rising to £5.8 billion in tax year 2023 to 2024. Were no changes made, it is expected that this would nearly triple to £8 billion by tax year 2030 to 2031.

The £2,000 contribution limit ensures contributions from those on higher incomes do not get a disproportionate benefit, whilst protecting lower income employees and their employers making typical contributions.

Salary sacrifice lowers an employee’s taxable pay, which reduces their adjusted net income. Adjusted net income determines eligibility for certain means-tested benefits such as Tax-Free Childcare, and is relevant for other important tax thresholds such as the Personal Allowance taper. This measure will not change the impact of salary sacrifice on adjusted net income. Employees can still make pension contributions outside or inside a salary sacrifice arrangement to reduce their adjusted net income. However, any salary sacrificed pension contributions above £2,000 will now be subject to employer and employee National Insurance contributions.  

Everyone using salary sacrifice for pensions contributions will retain some benefit from it. An estimated 56% of employees currently making typical pension contributions via salary sacrifice will be unaffected by this measure, but higher earners or those making larger contributions will pay National Insurance contributions on the excess above the contribution limit.

Background to the measure

From April 2017, the tax and National Insurance contributions advantages in relation to OpRA were largely withdrawn. Arrangements in relation to pension contributions were excluded from this change.

Detailed proposal

Operative date

The measure will take effect from 6 April 2029.

Current law

For the purposes of Class 1 National Insurance contributions, ‘earnings’ as defined in section 3 of the Social Security Contributions and Benefits Act 1992 comprise any remuneration or profit arising from an employment. Employer pension contributions made under a salary sacrifice arrangement are excluded from treatment as relevant amounts under the OpRA legislation and are therefore not subject to Income Tax or National Insurance contributions.

Proposed revisions

From 6 April 2029, earnings forgone pursuant to a salary sacrifice scheme above the £2,000 contribution limit for a tax year will be subject to Class 1 primary and secondary National Insurance contributions.

Primary legislation will be introduced to provide that salary or bonuses forgone to contribute to a pension scheme above a contribution limit of £2,000 will be treated as earnings under section 3 of the Social Security Contributions and Benefits Act 1992 and therefore will be subject to primary and secondary Class 1 National Insurance contributions.

Details on the design and operation of the £2,000 contribution limit will be set out in secondary legislation in due course, following stakeholder engagement.

Summary of impacts

Exchequer impact (£ million)

2025 to 2026	2026 to 2027	2027 to 2028	2028 to 2029	2029 to 2030	2030 to 2031
+0	-40	-55	-75	+4,845	+2,585

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

Using the latest available data, an estimated 7.7 million employees currently use salary sacrifice to make pension contributions. Of these, 3.3 million sacrifice more than £2,000 of salary or bonuses. This means 44% of employees using salary sacrifice for pensions would be impacted by this measure, while 56% — around 4.3 million people — are fully protected by the £2,000 threshold.

Affected individuals will now be liable to pay Class 1 primary National Insurance contributions on the relevant amount of salary or bonuses, above the contribution limit of £2,000, that they have sacrificed in favour of employer pension contributions. Of those with salary sacrifice contributions in excess of the contribution limit, the average additional employee National Insurance contributions liability is estimated to be £84 in the first year of impact (tax year 2029 to 2030). Some individuals may seek to reduce the amount of salary sacrifice pension contributions they make to limit the impact of these changes.

This measure is expected overall to have no impact on an individual’s experience of dealing with HMRC, as the change only affects the processes or tax administration obligations of their employer.

The measure is not expected to impact on family formation, stability or breakdown. 

Equalities impacts

An individual may be affected by this measure regardless of their protected characteristics. This measure is expected to impact on employees who operate or participate in salary sacrifice for pensions above the threshold. If a protected group is overrepresented in this population, then it will be disproportionately impacted.

Employees with salary sacrifice contributions are estimated to be of typical working age. In particular, those who are aged 31 to 50 (52%) are estimated to be overrepresented compared to their prevalence in the employee population in general (44%). Males are also estimated to be overrepresented in the population making salary sacrifice pension contributions (59%) compared to their prevalence in the UK adult population (50%).

HMRC does not currently hold data on the other protected characteristics of individuals impacted by this measure and so cannot make an assessment of the impacts on those with shared protected characteristics. 

Impact on business including civil society organisations

This measure is expected to have an impact on 290,000 employers who operate salary sacrifice arrangements for pension contributions who will now need to account for relevant pension contribution amounts and report and pay Class 1 National Insurance contributions on these, where appropriate.

One-off costs will include familiarisation with the change, the training of staff and updating of software. Continuing costs will include performing more calculations and recording and providing additional information to HMRC where salary sacrifice schemes continue to be used.

This measure is expected overall to have minimal impact on business’ experience of dealing with HMRC as reporting processes are expected to be in line with existing methods of reporting to HMRC.

This measure is not expected to impact civil society organisations, other than in their role as employers if they operate salary sacrifice schemes for pension contributions.

One-Off Impact	(£ million)
Costs	20
Savings	—

Continuing Average Annual Impact	(£ million)
Costs	30
Savings	—
Net impact on annual administrative burden	30

These figures are initial estimates and remain subject to change, including as we refine operational requirements through engagement with organisations affected by the change. 

Operational impact (£ million) (HMRC or other)

HMRC will need to make IT changes to support implementation of this measure. These changes are expected to cost in the region of £1.9 million. Additional changes to tax manuals and guidance will need to be updated and broader communication channels will be used to convey the changes.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

Consideration will be given to monitoring and evaluation of the policy once monitoring data has been analysed and collected.

Further advice

If you have any questions about this change please contact HMRC at nics.policy@hmrc.gov.uk.