Why salary sacrifice remains a powerful tool within DC pensions 

The annual threshold for such contributions will be set at £2,000 from April 2029 as outlined by the chancellor. But besides this being three years away, even once it has been implemented, salary sacrifice will still possess tax-efficient benefits. That means employers should continue to educate their workers on its merits.

Changes to pensions can cause a lot of uncertainty and that’s why it’s vital for companies to assess what has actually happened.

In the 2025 Budget, the chancellor Rachel Reeves outlined forthcoming alterations to the salary sacrifice regime, which prompted widespread concern.

While some might argue the proposals - to cap the pension contributions that can be made free of National Insurance via salary sacrifice at £2,000 per employee per year - discourage long-term savings, the benefits of the policy have not been entirely eradicated.

That’s because even once the rule is enacted in three years’ time, salary sacrifice will still be available for firms to offer to their employees. And workers will still be able to sacrifice £2,000 of their salaries in this way without any tax implications.

Over and above that level, National Insurance contributions (NIC) will apply to both employers and their people, albeit even with the change implemented, pensions will still be fundamentally tax efficient.

Not only will income tax relief still apply, but salary sacrifice will still be available on the first £2,000 without National Insurance being liable. That makes salary sacrifice more tax-efficient than standard pension contributions, which trigger both employer and employee NIC in respect of the employee’s contributions.

Our DC (Defined Contributions) MOT report reveals that only 75% of employers use salary sacrifice in full, which means there is a significant minority of employers that are not taking full advantage of the tax incentives offered by salary sacrifice.

There is a possibility that the public discussion that followed the announcement about the forthcoming salary sacrifice cap created confusion and disproportionate concern about the overall value of pensions.

However, it is important for employers to ensure they fully comprehend what any changes actually mean, and then educate their workers about any potential impacts. It is encouraging that 55% of employers engage with their staff about their pensions at least annually, according to our DC MOT data.

In relation to salary sacrifice, it could be prudent for employers to provide guidance to their people here, particularly for more highly paid employees who could be the most exposed to the incoming cap on salary sacrifice NIC savings.

Movements in national pension policy do require attention from employers because they can add new complexities and limits.

However,  that does not mean the benefits of pensions are completely removed, and DC schemes still offer one of the most tax-efficient routes for retirement savings in the UK.

With regards to the forthcoming salary sacrifice changes, there are a few legitimate structural and design considerations that can help mitigate the impact of the new cap.

These will vary depending on a scheme’s profile, and we will be working closely with our clients to explore what approaches may suit their circumstances.

These will vary depending on scheme profile, and we will be working closely with our clients to explore what approaches suit their circumstances.