WIREDGOV

Who would be most affected by the government’s planned reform to the NICs treatment of salary sacrifice pensions and would it improve the tax system?

Executive summary

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. In this report, we provide evidence on which groups of employees are currently more likely to make salary sacrifice contributions above this threshold and the types of employers they work for. We also show how much extra NICs these groups would be liable for due to the policy if they continued to make the same contributions.

The ultimate impact of the policy will depend on how different groups of employees and employers respond. There is a range of different potential behavioural responses to the policy, including changes in pension contributions, remuneration and hours worked. The magnitude of these responses – and who will make them – is highly uncertain, leading to considerable uncertainty about the revenue raised by the reform. As a result, although we discuss these behavioural responses, our empirical results abstract from them for the most part, showing who would be most affected by the policy based on current contributions.

1. Introduction

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.1

This change was one of the largest revenue-raising measures in the Budget, with the OBR expecting it to raise £4.7 billion in 2029–30, falling to £2.6 billion in 2030–31 in nominal terms (Office for Budget Responsibility, 2026).2 However, little is known about who will be affected by this tax.

In this report, we aim to bridge this gap, offering more insight into which groups of employees and employers are more likely to be directly affected by this reform. In particular, we analyse which types of employees are more likely to make salary sacrifice pension contributions, and the types of firms they work for. We outline how much extra NICs different groups would expect to pay if their pension contributions were unchanged, and we conclude by providing a brief evaluation of the policy.

Current National Insurance treatment of pension contributions

The NICs treatment of pension contributions depends on whether they are formally made by an individual or their employer. Pension contributions made by individuals are liable for both employee and employer NICs at the time the person is paid. In contrast, pension contributions formally made by employers attract neither employee nor employer NICs.

In retirement, pension income is not subject to either employee or employer NICs. Therefore, remuneration in the form of employer pension contributions is never subject to any form of NICs – neither when it is paid into the pension, nor when it is taken out.3 This generous NICs treatment of employer pension contributions is the biggest tax break for pensions in overall revenue terms (Adam et al., 2023).

As the NICs treatment of employer pension contributions is more generous than that of employee pension contributions, it is in the interests of both employees and their employers to make employer pension contributions in place of employee pension contributions where they can.

Salary sacrifice schemes provide exactly this opportunity. Under this arrangement, the employer makes higher employer pension contributions in exchange for a reduction in the employee’s pay. Relative to a scenario in which the salary sacrifice contributions were instead made as an employee pension contribution, this reduces the tax liability for both the employer and the employee, since employer and employee NICs are avoided.

Importantly, this tax relief is not available to all workers. Not all employers offer salary sacrifice arrangements, and self-employed workers have no employer to make employer pension contributions on their behalf.

What is the announced policy?

In the November 2025 Budget, the Chancellor announced a substantial reform to the tax relief offered to employees making salary sacrifice contributions. From April 2029, salary sacrifice pension contributions above £2,000 per year will be subject to both employee and employer NICs. In other words, above this threshold, salary sacrifice pension contributions will be taxed identically to individual pension contributions. Ordinary employer pension contributions will remain exempt from NICs.

How might individuals and firms respond to the policy?

The bulk of our analysis in this report is based on the mechanical impact of the changes without factoring in behavioural responses. This means we document which groups of employees and employers are affected, and what the resulting NICs liabilities would be, without modelling changes that employees and employers may make in response. Nevertheless, we expect several behavioural responses both by employees and by employers.

The first potential response is that employers could change their pension offering. As the policy change will mean that salary sacrifice pension contributions are no longer as tax-advantaged as employer pension contributions, employers might respond by increasing the standard contractual level of employer contributions and reducing pay. Due to Optional Remuneration Arrangements rules, it would be difficult for employers to target this only at people who currently make salary sacrifice contributions above the £2,000 threshold (Office for Budget Responsibility, 2026).

Rebalancing remuneration by increasing the offer of employer contributions and reducing (or limiting rises in) pay would help limit the impact on employers and directly affected employees. But because it could not be targeted only at these directly affected employees, it would negatively impact some employees who work at employers that offer a salary sacrifice pension scheme, but who currently choose not to make salary sacrifice contributions themselves. This is because it restructures their remuneration towards pension contributions in a way they would otherwise not have chosen. The official costing predicts that this response will reduce the tax revenue raised by £0.7 billion in 2030–31 in nominal terms (Office for Budget Responsibility, 2026).

Alternatively, some employers may stop offering salary sacrifice pension schemes at all due to the policy, as it will likely increase the administrative costs of these schemes while also making them less financially attractive. An employee working for such an employer and currently making salary sacrifice pension contributions of £2,000 or less would therefore also lose out from the policy, as they would only be able to make ordinary employee contributions instead.

Employees may respond by reducing their salary sacrifice pension contributions from 2029–30. The policy change makes saving into a salary sacrifice pension less tax-advantaged, which will discourage both employees and employers from doing it. Some employees might try to avoid paying any extra NICs by, for example, taking advantage of other salary sacrifice schemes, such as the cycle-to-work scheme. Some employees may switch to making ordinary employee contributions (on at least a portion of their contributions), as the tax asymmetry between salary sacrifice and ordinary employee contributions falls. More generally, as this change reduces the overall tax incentive to make pension contributions, we would expect total pension contributions to fall from 2029–30. On the other hand, before the changes are implemented in 2029–30, we may expect an increase in salary sacrifice pension contributions as employees shift forward their contributions in time in order to reduce their overall tax liabilities.

Alternatively, employees may respond to the change by reducing their hours of work. On average, the policy increases the effective tax rate on earning an additional pound for workers who make salary sacrifice pension contributions. Consequently, workers will face a weaker incentive to work.

Finally, the policy increases the employer costs of employing people who currently salary sacrifice more than £2,000 per year. Employers might pass this on to employees by reducing remuneration or the number of workers they hire. This effect might not just be confined to those employees directly affected by the policy; for example, an employee who works at a firm facing a large increase in employer cost due to the change, but who does not make salary sacrifice themselves, could still face a reduction in remuneration. Any reduction in remuneration and hours worked due to the policy would reduce income tax and National Insurance receipts, reducing the revenue raised by the reform. While we would generally expect the long-run impact of higher employer NICs to be principally felt by employees,4 in the shorter run employers could also respond by raising prices or accepting reduced profits, which in turn would impact consumers or shareholders respectively.

We do not incorporate these responses into most of our quantitative analysis for two reasons. First, avoiding extra NICs through a behavioural response does not mean an employee is unaffected by the policy. For example, if an employee switches from making salary sacrifice pension contributions to some other scheme to avoid paying more NICs (e.g. the cycle-to-work scheme), they are only able to keep their tax bill unchanged by changing their behaviour – something they would not have chosen to do absent the policy. The fact that they previously preferred salary sacrifice pension contributions means the switch itself makes them worse off, even if it leaves their overall remuneration and tax bill unchanged. As a result, the impact of the policy before behavioural responses may be a better guide to the distributional impact on welfare than the impact after behavioural responses.

Second, it is hard to model behavioural responses accurately. The official costing of the policy by HMRC (and certified by the OBR) relies on a range of assumptions about the scale of different responses (Office for Budget Responsibility, 2026). Modelling such responses differently for different groups would require yet more assumptions beyond those made by the OBR and would add additional uncertainty to our results.

2. Which groups are most affected by the reform?

To assess which groups of employees and employers would be most directly affected by the reform, we use the Annual Survey of Hours and Earnings (ASHE), a representative survey containing employer-reported information on earnings and pension contributions for a large random sample of employees in UK. Importantly, this data set distinguishes between employee, employer and salary sacrifice pension contributions (unlike administrative data collected by HMRC, which cannot split out salary sacrifice pension contributions from ordinary employer contributions). ASHE also contains some limited information on employee and employer characteristics.

For each employee in this data set, we can observe their reported amount of salary sacrifice pension contributions.5 We make two adjustment to these amounts. First, the reform is not due to come into effect until 2029–30, but the latest ASHE data containing pension information that we have access to are from 2021. We therefore uprate pay and pension contributions to 2029–30 in line with observed and OBR forecast average earnings growth, before expressing all cash amounts in 2026–27 prices.6 In addition, analysis from HMRC and the OBR suggests that ASHE does not accurately measure contributions to pensions sacrificed out of bonus payments. As a result, we follow HMRC and the OBR in assuming that 47.25% of received bonus earnings are sacrificed into pensions for employees with a salary sacrifice defined contribution pension (Office for Budget Responsibility, 2026).7

We use these data to compute the share of employees who make salary sacrifice pension contributions of over £2,000 per year and the implied employee and employer NICs liability. To reiterate an important earlier point, we assume no behavioural response for all analysis using ASHE; that is, we compute these results without allowing salary sacrifice pension contributions to change due to the policy.

Overall, just over a quarter of all employees make salary sacrifice pension contributions, with around 15% of all employees contributing more than the £2,000 threshold, as shown in Figure 1. Note that this figure (and the figures that follow) is calculated across all employees (rather than just restricting to pension savers); that is, we include employees who are not making pension contributions at all. Among pension savers, around one-third make salary sacrifice pension contributions.

Figure 1 also shows that, unsurprisingly, there is a steep earnings gradient to whois directly affected by the policy. Higher earners are much more likely to make salary sacrifice contributions: over half of those in the highest earnings decile save in a salary sacrifice scheme, compared with just 7% of those in the bottom two earnings deciles. In addition, conditional on saving in a salary sacrifice scheme, higher earners are much more likely to make contributions exceeding the £2,000 threshold than lower earners. Consequently, 48% of employees in the highest earnings decile would be directly affected by the policy, compared with less than 1% of employees in the bottom fifth of the earnings distribution.

Without any behavioural response, the reform would lead to extra NICs of slightly over £140 per employee per year on average, the vast majority of which (£123) comes from employer NICs, as shown in Figure 2. This reflects the fact that most affected employees earn above the upper earnings limit (£50,270 per year) where the employer NICs rate of 15% far exceeds the employee rate of 2%.

Figure 2 also highlights that there is an even steeper earnings gradient in the extra NICs liabilities than in Figure 1. This is because employees in the highest decile are not only more likely to sacrifice more than the £2,000 threshold, but also more likely to sacrifice much more than this threshold. The bottom fifth of earners would face approximately no extra NICs under the policy, consistent with very few of this group salary sacrificing more than £2,000 into a pension. In contrast, the total average additional NICs liability for employees in the top earnings decile (and their employers) is almost £1,000 per year, mostly in the form of employer NICs. 69% of the total additional NICs liability is borne by the top earnings decile and their employers.

Figure 3 shows that employees aged 30–59 are more likely to salary sacrifice over £2,000 per year than employees younger than 30 or aged 60 and over. This is likely partly due to lower overall pension participation rates for younger and older age groups.8 Interestingly, employees aged 30–39 are slightly more likely to make salary sacrifice contributions than those aged 40–59. This could be because employees aged 40–59 are more likely to work in the public sector, where salary sacrifice contributions are less prevalent (as shown later on). This figure also shows that men are more likely to make salary sacrifice contributions exceeding £2,000 than women. This principally reflects the fact that women are more likely than men to be lower earners and are more likely to work in the public sector, and that these groups are less likely to be directly affected.

Figure 4 shows a similar pattern in terms of the additional employee and employer NICs. The youngest and oldest employees will see a smaller increase in both their and their employers’ NICs liabilities than those aged 30–59. Of course, we would expect the youngest age group of employees to increase their contributions with age, and so to be more affected by the policy when they are older. Indeed, given older workers have had many years to take advantage of tax-advantaged salary sacrifice contributions already, in the long run it is younger generations of employees who will be most affected. This figure also highlights that men and their employers will, on average, see larger tax implications from the reform than women and their employers.