The government led by Prime Minister Andy Burnham is scheduled to implement significant changes to workplace pensions from 2029, with Chancellor John Healey responsible for administering the already-announced reforms. These changes, inherited from the previous administration under Sir Keir Starmer, will alter the tax treatment of salary sacrifice pension contributions.
Salary Sacrifice Changes from 2029
In November 2025, the Chancellor announced that salary sacrifice pension contributions – whereby employees agree to a reduction in their salary in return for additional employer pension contributions – above £2,000 per year will no longer be exempt from employer and employee National Insurance contributions (NICs) from 2029–30 onwards. This policy is set to affect a specific segment of the workforce.
According to the Institute for Fiscal Studies (IFS), the policy mainly affects the top tenth of the household income distribution. If pension contributions remained unchanged and employers were to pass on the extra employer NICs through reductions to affected employees’ wages, households in this top decile would lose, on average, over £300 per year due to the policy.
Advice for Businesses and Impact on Employees
Issuing advice to businesses, Bishop Fleming recommended several steps: "Assess the likely cost across your workforce (how many employees exceed £2,000 of salary sacrifice and by how much)." They also advised reviewing pension top-up policies and how they are funded, particularly where NI savings are shared, and reconfirming the value of salary sacrifice below £2,000, as the NI benefit may remain unchanged for many employees under that level.
Bishop Fleming further suggested planning communications early to avoid confusion and protect trust in workplace benefits, considering a broader rewards strategy including pensions, salaries, bonuses, and other benefits to remain competitive, and speaking to advisers to identify tax efficiencies and practical implementation options.
Higher Earners Most Affected
The IFS also found that higher-earning employees are much more likely than lower earners to make salary sacrifice pension contributions of more than £2,000 per year. Matthew Olton and Laurence O'Brien, from the IFS, added: "The announced reform raises a significant, though highly uncertain, amount of revenue, particularly from higher earners. While it does not introduce significant new distortions to the system, it equally does not address the fundamental problems with how pension contributions attract NICs and it does add complexity."
