Will the 2025 Autumn Budget bring about changes to salary sacrifice rules in the UK?

Salary sacrifice is an arrangement where an employee agrees to give up part of their gross salary in exchange for a non-cash benefit, such as pension contributions, childcare vouchers, or cycle-to-work schemes. Instead of receiving that portion of pay as income, it is redirected towards a benefit chosen by the employee.

This approach can reduce both Income Tax and National Insurance (NI) contributions. Employees pay less tax because their taxable salary is lower, and employers save on NI contributions for the same reason. These savings have become even more important following last year’s rise in NICs, which increased the cost burden for both businesses and employees. Access our NI Report to discover real world examples and data of businesses using salary sacrifice schemes and employee benefits to lower the National Insurance Contributions. For large organisations, these savings can add up significantly, especially when managing extensive benefits packages across a large workforce.

Beyond cost efficiency, salary sacrifice helps businesses offer competitive benefits without increasing overall payroll costs. It is a strategic tool for attracting and retaining talent while maintaining compliance with tax regulations.

Industry experts and media reports are increasingly focused on potential reforms to salary sacrifice schemes, particularly those linked to pensions. The strongest speculation is around the introduction of a cap on the amount employees can contribute via salary sacrifice. According to recent coverage, this could limit the tax advantages currently enjoyed by higher earners who make large pension contributions.

The government’s rationale, as suggested by Treasury sources and echoed in the Chancellor’s pre-budget speech, is to control the rising cost of pension tax relief and ensure fairness across income brackets. Salary sacrifice has been highlighted as an area where tax benefits disproportionately favour those on higher incomes, making it a likely target for reform.

As of 2024, there is no formal salary sacrifice contributions cap in the UK. For pensions, contributions made through salary sacrifice are only limited by the annual allowance, which is currently £60,000 for most individuals. This means employees can redirect a significant portion of their salary into benefits without breaching any specific cap.

However, speculation ahead of the 2025 Autumn Budget suggests this could change. Reports on budget salary sacrifice reforms point to two possible approaches:

• A fixed monetary limit: For example, a cap of £10,000 to £20,000 per year on salary sacrifice contributions for pensions and other benefits.
• A percentage of salary: Setting a maximum proportion of earnings that can be exchanged for benefits under salary sacrifice.

If a cap on salary sacrifice is introduced in the budget, the financial impact might not be as severe as some fear. One reason is how National Insurance (NI) contributions work. While the details of any cap are still unclear, one option being discussed is that employee contributions above a set threshold could become subject to NI. 

However, the NI system includes an upper earnings limit of £50,270. Above this point, the NI rate for employees drops from 8% to just 2%. This means that any additional contributions above the cap would attract NI at the standard rate up to the limit, but anything beyond that would be charged at the much lower rate. In practice, this could significantly reduce the overall cost for higher earners compared to initial expectations.

The main policy objective behind a potential salary sacrifice cap is to reduce the growing cost of tax relief on pensions. This link between budget and salary sacrifice reflects the government’s aim to control expenditure while ensuring fairness across income brackets. HM Treasury data shows that pension tax relief costs the government tens of billions of pounds annually, making it one of the largest tax expenditures in the UK. Salary sacrifice arrangements amplify these costs because they allow employees, particularly high earners, to make large contributions while avoiding Income Tax and National Insurance.

Introducing a cap would also align with the government’s stated aim of making the system fairer and encouraging broader participation. Previous reforms, such as adjustments to the annual allowance and measures announced in the Autumn Budget 2021 to support low earners through top-up payments, reflect a consistent policy direction towards sustainability and equity in pension tax relief.

Limiting contributions could help redistribute tax advantages more evenly and ensure the system remains affordable for the Treasury.

If the government introduces a salary sacrifice cap, the impact on large organisations could be significant. A cap would reduce flexibility for high earners who currently use salary sacrifice to make substantial pension contributions. This could affect the attractiveness of executive benefits packages and require employers to rethink how they support senior staff. If you’re concerned about how a cap might affect your benefits strategy, explore the full benefits of salary sacrifice and why it remains a key part of competitive packages, even with potential changes

Any change would mean updating payroll systems, revising HR policies, and ensuring compliance with new rules. For businesses with complex benefits structures, this could involve considerable time and cost. Discover the benefits of an integrated HR system to streamline payroll, manage benefits, and stay ahead of regulatory changes, all in one platform.

Senior employees who lose tax advantages may feel dissatisfied, which could affect retention. Clear communication and alternative benefits will be essential to maintain engagement. As Dianne Hoodless explains in Episode 7: Invest in your greatest asset – your people of our Do the Best Work of Your Life series, retaining talent often comes down to how well you showcase the full value of your benefits package:

“A lot of businesses these days would rather retain than recruit. So when our recruitment team looks for talent, we have dedicated benefit booklets to show what we offer. We want to retain the talent we’ve got—and to recruit, we want to be better than our competitors.”

Financial implications

• Higher Employer NI Costs: If contributions above the cap become subject to NI, employers could face increased costs.
• Redesigning Benefits: Organisations may need to restructure packages to remain competitive, possibly introducing other perks or higher base salaries.
  

Compliance and risk

• Staying Compliant: Businesses must monitor official guidance and update processes promptly to avoid breaches.
• Penalties: Non-compliance could lead to fines or reputational damage, especially for large employers under scrutiny.

With speculation around a salary sacrifice cap in the 2025 Autumn Budget, large businesses should take proactive steps to prepare for potential changes:

• Review current salary sacrifice arrangements - Audit existing schemes to understand how much employees, particularly high earners, are contributing. Identify any areas that could be affected by a cap.
• Model financial impact of potential caps - Use scenario planning to estimate how different cap levels (e.g., £10,000 or £20,000) would affect payroll costs, employer NI contributions, and overall benefits spend.
• Communicate proactively with employees - Keep staff informed about possible changes and reassure them that the organisation is monitoring developments. Transparency will help manage expectations and maintain trust.
• Consider alternative benefits strategies - If salary sacrifice becomes less attractive, explore other ways to offer value, such as flexible benefits, wellbeing initiatives, or enhanced employer pension contributions within the new limits.

Communication in particular is key to promoting benefits and maintaining relationships with your employees.

 As Catherine Bennett, General Manager of Access Engage notes in Episode 7: Invest in your greatest asset – your people of our Do the Best Work of Your Life series, there’s a disconnect between businesses and employees when it comes to their benefits packages:

“Communication is absolutely key. The latest stats show that whilst 90% of employers think they do a fantastic job communicating their employee benefits, 50% of employees aren’t sure what their package looks like.”

The 2025 Autumn Budget could bring significant changes to salary sacrifice arrangements, including the possibility of a cap on contributions. While nothing is confirmed yet, the speculation highlights the need for employers to act now.

Proactive planning is essential. Review your current benefits strategy, model the potential financial impact of different scenarios, and communicate openly with employees to manage expectations. Considering alternative benefits options will help maintain competitiveness if reforms are introduced.

Salary sacrifice changes could reshape how you manage employee perks and retention. Don’t wait for the Autumn Budget to catch you off guard. Start building a connected, engaging benefits experience today.

Access Employee Engagement Software streamlines benefits, boost communication, and keep your workforce engaged, all in one platform.