How pension contributions would change
Former Chancellor Rachel Reeves announced the restriction in last year's Budget. It limits the National Insurance exemption for pension salary sacrifice, rather than the amount workers can contribute to their pensions.
Salary sacrifice lets an employee exchange part of their pay for a benefit. For pensions, the employer pays that amount into the worker's workplace pension, allowing both parties to save on National Insurance under the current rules.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said contributions above the new annual threshold would retain their income tax savings but attract National Insurance for both the employee and employer. She warned that workers paying the auto-enrollment minimum might be protected, yet could be discouraged from increasing contributions if doing so took them over £2,000.
The existing arrangements remain available until April 2029, giving workers time to make contributions and benefit from the current National Insurance savings before the restriction begins.
Who would pay more
A government policy document published December 4, 2025, estimates that 7.7 million employees use pension salary sacrifice. About 3.3 million give up more than £2,000 in salary or bonuses through these arrangements. The document puts the share affected at 44%, with 56%, or around 4.3 million people, fully protected by the threshold.
Among users whose contributions exceed the cap, the government estimates an average additional employee National Insurance bill of £84 in 2029-30, the first tax year affected.
The impact differs by earnings. Research published by the Institute for Fiscal Studies on May 13, 2026, found that 48% of employees in the highest-earning tenth contribute more than £2,000 a year through pension salary sacrifice. Fewer than 1% of employees in the lowest-earning fifth do so.
Morrissey said the government's rationale was that higher earners had received most of the benefits. Treasury minister Lord Livermore defended the plans earlier this year as "fair and balanced reforms," saying 74% of basic-rate taxpayers using salary sacrifice would face no change. Those basic-rate taxpayers above the cap would retain National Insurance relief on their first £2,000 and full income tax relief on employee pension contributions.
Employer costs and possible effects on wages
Morrissey said employers would face 15% National Insurance on the portion of employee pension salary sacrifice above £2,000. She warned that the extra cost could constrain future pay increases and weaken workers' financial resilience.
The IFS estimated that affected households in the highest-income tenth could lose about £890 annually on average. That estimate assumes pension contributions do not change and employers pass the entire additional National Insurance cost to affected employees through lower wages.
Before any behavioral adjustments, the IFS puts the average annual increase in employer National Insurance at £151 per private-sector employee, compared with £37 per public-sector employee. The private-sector figure is more than four times as high.
Employers would also face administrative work. The government expects a significant impact on 290,000 employers operating pension salary sacrifice schemes, which would need to account for the relevant contribution amounts and, where required, report and pay Class 1 National Insurance.
Livermore said the April 2029 start date gives employers ample time to prepare.
Why the government is restricting relief
The reform is intended to recover some of the revenue forgone through salary sacrifice. According to the government's policy document, the cost of the National Insurance relief increased from £2.8 billion in 2016-17 to £5.8 billion in 2023-24. Without reform, it was forecast to reach £8 billion in 2030-31, nearly triple its 2016-17 level.
Government costings project additional National Insurance receipts of £4,845 million in 2029-30 and £2,585 million in 2030-31.
Separately, The Telegraph reported on August 19, 2026, that a breakdown disclosed under Freedom of Information rules assigned around £3 billion of the Treasury's expected additional National Insurance to businesses. Workers would pay the remaining £468 million directly through higher National Insurance contributions.
