With the Autumn Budget just around the corner, there has been much speculation surrounding how Chancellor Rachel Reeves’ new policies will impact the taxation landscape. One of the most prominent rumours relates to salary sacrifice, with the implementation of a restriction on the amount of a person’s salary that can be sacrificed before incurring National Insurance.
It is important to remember that this article is informational, serving only to unpack a rumoured change, and that currently no change has been made to salary sacrifice legislation. This article does not serve as retirement planning advice.
A recap: What is salary sacrifice and how does it work?
Salary sacrifice is an arrangement between an employee and their employer, whereby the employee agrees to give up part of their gross salary in exchange for a non-cash benefit. Most commonly, this benefit is an increased pension contribution.
The key benefit is that sacrificed salary is free from both income tax and National Insurance payment as it is taken from the gross salary before any deductions.
Under current legislation, there is no limit to the amount of a person’s salary that they can sacrifice, making this a highly effective tool for those looking to grow their wealth and prepare for retirement in a tax-efficient way.
The rumour: How might salary sacrifice change after the Autumn Budget?
Rumours abound regarding a potential change to salary sacrifice legislation, with the government allegedly considering placing a £2,000 cap on the amount of salary that an employee can sacrifice before incurring employee National Insurance contributions.
Currently, there is no employee National Insurance on any salary up to £12,570. Between £12,570 and £50,270, employee National Insurance is charged at 8%. Above £50,270, employee National Insurance is charged at 2%.
While this rumoured change doesn’t completely negate the tax-efficiency of salary sacrifice as no income tax is paid, it will significantly limit the overall effectiveness of salary sacrifice schemes, especially for those looking to make larger contributions.
Who would be most affected by a cap on salary sacrifice?
Should this rumoured change crystallise, high earners stand to feel the greatest impact. Those currently sacrificing tens of thousands of pounds annually into their pension will see a dramatic increase in their National Insurance payments. Mid-to-lower earners are less likely to be affected by this change in a substantial way.
Example: Low-mid earner
An employee earning £35,000 and reducing their salary by 5% would be sacrificing £1,750, which is below the £2,000 threshold and therefore no employee National Insurance payment would be triggered.
However, for an employee earning £45,000 and reducing their salary by 5%, the amount sacrificed would be £2,250. As a result, the £250 over the £2,000 threshold would be taxed at the 8% National Insurance rate, meaning an additional employee National Insurance payment of £20.
Example: High earner
As salary amounts scale, the National Insurance payment increases significantly.
An employee earning £80,000 reducing their salary by 10% would salary sacrifice £8,000. The £6,000 above the £2,000 threshold would be charged National Insurance at 2%, resulting in an additional employee National Insurance payment of £160.
High earners would likely need to reconsider how much they contribute to salary sacrifice schemes, potentially seeking more tax-efficient strategies via alternative investment vehicles.
It is also important to remember that any change to salary sacrifice schemes would only impact pension contributions made directly through your employer. Pension contributions from outside salary, if possible, may be an effective way to aid in your retirement planning.
Working alongside a financial adviser could help you to adjust your retirement strategy in the most effective way as required.
*The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
SJP Approved 19/11/2025
