15th May 2026
Rather than being a principled reform to the taxation of pensions, this change creates another new arbitrary line in the tax system.
In last November’s Budget, the Chancellor announced that salary sacrifice pension contributions above £2,000 per year will be liable for both employer and employee National Insurance contributions (NICs) from 2029–30.
Salary sacrifice contributions are made by employers in return for an employee giving up part of their salary, and are currently exempt from NICs. Around 7.5 million employees currently contribute to their pension via salary sacrifice arrangements.
This change was one of the largest revenue-raising measures in the Budget, with the Office for Budget Responsibility (OBR) expecting it to raise £2.6 billion per year by the early 2030s.
Read the full IFS report HERE
A new IFS report, published today, analyses which groups are more likely to be affected by this policy.
The report finds:
Higher earners are particularly likely to make salary sacrifice pension contributions of over £2,000 per year: 48% of employees in the top 10% of earners do so, compared with less than 1% of employees in the lowest-earning fifth.
For affected workers, the mechanical effect of the reform will be a small increase in employee NICs, reducing take-home pay, and a much larger increase in employer NICs, increasing employer costs. We, and the OBR, expect the higher employer cost to be passed on – to a significant extent – through lower wages for employees.
As the reform principally affects high-earning individuals, it will also particularly impact households with higher incomes. Around 65% of households in the top decile would experience no change in income as they do not use salary sacrifice.
Affected households in the top tenth of the household income distribution could lose around £890 per year on average due to the policy. This assumes that pension contributions remain unchanged and that extra employer NICs are fully reflected in lower wages for affected employees.
Private sector employers will be affected by the policy to a much greater extent than public sector employers. Before any behavioural adjustments, the average yearly increase in employer NICs in the private sector (£151 per employee) is over four times that in the public sector (£37). Within the private sector, the most affected industries will be finance & insurance and information & communication.
While the change raises significant tax revenue, it falls short of a principled reform to pension taxation. It adds complexity to the system, requiring employers and HMRC to track and tax salary sacrifice contributions above the threshold. In addition, it does not tackle the core issue with the NICs treatment of pension contributions – namely, that employer pension contributions are entirely exempt. This is an opaque tax incentive that creates a large asymmetry with employee pension contributions, which are liable for NICs.
Matthew Oulton, a Research Economist at the Institute for Fiscal Studies and an author of the report, said, "This change to rules on salary sacrifice pension contributions will likely raise significant tax revenue principally from higher-earning private sector employees. This additional revenue is a clear motivation for the government. However, rather than being a principled reform to the taxation of pensions, the change creates another new arbitrary line in the tax system.
‘It does not tackle the fundamental issue with the NICs treatment of pension contributions: the asymmetry between the taxation of employer and employee contributions. A more ambitious reform would have been to replace the blanket exemption of employer pension contributions from employer NICs with a new, less generous subsidy, designed to raise similar revenue to the announced reform.
This would improve the coherence of how the government incentivises pension saving by reducing the asymmetry in tax treatment between employer and employee pension contributions, while also extending incentives for pension saving to groups currently not covered by them, such as employees aged under 21.’
Comment on An Unfair System
many critics argue the government’s changes are still fundamentally biased toward higher earners — even though ministers say the reforms are designed to make the system “fairer”.
Under the new rules announced by the UK government, only the first £2,000 of pension salary sacrifice contributions will remain exempt from National Insurance from 2029 onwards. The Treasury argues this stops wealthier workers using salary sacrifice as a major tax shelter while protecting ordinary employees making smaller pension contributions.
But the reality is more complicated.
Higher earners still gain disproportionately from pension tax relief because they pay tax at 40% or 45%, meaning every pound contributed to a pension saves them far more tax than a basic-rate worker. Salary sacrifice also remains especially valuable for people earning over £100,000 because it can help them avoid the notorious “60% tax trap” caused by the tapering of the personal allowance.
The Institute for Fiscal Studies recently pointed out that the reforms mainly affect higher earners simply because they are the people most likely to use large salary sacrifice arrangements in the first place. Nearly half of workers in the top 10% of earnings currently sacrifice more than £2,000 a year into pensions, compared with almost none of the lowest earners.
That creates an awkward contradiction for the government. Ministers say the reform tackles an unfair perk for the wealthy, yet even after the cap, wealthier workers still retain far greater ability to reduce tax bills through pensions than ordinary earners do.
There is also another criticism: lower-paid workers often cannot afford to sacrifice much salary into pensions anyway because of high living costs, rent, mortgages and energy bills. So while technically everyone can use salary sacrifice, in practice it is mainly people with spare disposable income who benefit most.
Some economists therefore argue the entire pension tax relief system is structurally tilted toward wealthier households. Someone earning £150,000 can receive thousands of pounds in tax advantages every year simply because they can afford large pension contributions, while somebody on £28,000 may struggle to save anything beyond auto-enrolment minimums.
The reforms may even widen another divide — between private and public sector workers. Many public sector employees rely on defined-benefit pension schemes and use salary sacrifice less heavily, meaning the changes disproportionately hit higher-paid private sector professionals.
Critics also note that wealthier people are often the most financially informed and can adapt more easily. Already there is discussion among accountants and financial planners about shifting toward alternative employer pension contribution structures that may partly sidestep the intended impact of the reforms.
So while the government has reduced one of the biggest advantages of salary sacrifice, the broader tax and pension system still arguably favours those on higher incomes. The reforms may trim the edges of the inequality, but they do not fundamentally change the fact that the people who can afford to save the most still receive the biggest rewards from the system.