Salary sacrifice and employment tax changes: What employers need to know

The Chancellor, Rachel Reeves, today announced her Autumn 2025 Budget. There are several changes that are going to impact on employers and employees alike, with both good and welcome news.

One of the changes that stand out is to the salary sacrifice regime for pensions.

What is salary sacrifice?

Under salary sacrifice, employees have the option of waiving a portion of their salary in exchange for additional employer pension contributions. The amount of salary waived (or sacrificed) is not subject to national insurance contributions (NIC), providing savings for both the employer and employee.

A survey by Towergate Employee Benefits earlier this year found that 48% of employers operate salary sacrifice arrangements on their pension schemes. Uptake varied widely dependent on the number of employees a company had, with only 38% of those employing 20 or fewer people offering a salary sacrifice scheme, which increased to 67% where 250 or more staff had been employed. The impact therefore is likely to be felt by larger employers in the main.

What could be the impact of the changes?

The changes proposed today which come in to effect from April 2029, adds a cap of £2,000 annually on the amount of salary that can be sacrificed, estimated to bring in £4.7 billion to the government. Currently, no such cap exists and as such, both employer and employee contributions will be levied on any contributions over that threshold. The impact of this could be significant for both employer and employee.

The UK Office of National Statistics (ONS) estimated the median annual salary in April 2025 as £39,039. Under current government auto-enrolment rules, unless opting out, employees contribute a minimum of 5% of their pensionable earnings.

The threshold appears to have been set intentionally to apply only to those with pensionable pay above this median income. So, those with pensionable pay of £40,000 or less, when making the minimum contributions would incur no additional charge for either employer or employee under the new rules.

The situation changes for employers when their employees go beyond the minimum contribution level. Taking the above example employee, with pensionable pay of £40,000, but increasing their contributions modestly to 7.5% results in an increase to employer liabilities of £150 per year, with £80 more being due from the employee. Whilst this may not seem particularly significant, the impact for a business with 10 employees in the same scenario would be £1,500 annually. For those with 100 such employees, this would rise to an additional employer cost £15,000 per year.

Should we increase the pensionable pay considered to £60,000 per year at the minimum contribution rate, this would result in a £150 cost for the employer. This is compared to a much lower cost of £20 for the employee, since the lower 2% upper earnings threshold applies in this example. Scaling this up to consider the wider impact once again, we can see that with 10 employees, this means an increased employer cost of £1,500 and with 100 employees, this climbs to £15,000.

In the light of last year’s budget, where the rate of employer contributions increased from 13.8% to 15% and the threshold at which this was paid dropped from £9,100 to £5,000, there is likely to be a compounding effect on employer’s costs.

How do we think this could change behaviour?

It is estimated that these changes will not affect 74% of basic-rate tax paying employees who are in a pension salary sacrifice scheme. The savings that an employer could make when an employee agrees to enter a salary sacrifice scheme, are just that, savings. Any salary not sacrificed would have been subject to NIC anyway. But this decrease in the employer saving is still going to have a negative impact on businesses who will have prepared budgets having taken these savings in to account.

Given that savings are still possible, we would absolutely encourage employers without a salary sacrifice scheme to contact us for assistance in putting one in place. Whilst the savings might not be as much as they could have been, there are still savings to be made. Given recent increases in NI rates/thresholds and a further increase in national minimum wage (NMW), a pension salary sacrifice scheme is still a great way to incentivise employee retirement funding whilst lowering employer costs.

It should also be noted that tax relief is still available on pension contributions, so whilst you can only sacrifice a maximum of £2,000 into a pension scheme, putting any additional amount above this into a pension, is still better value for money than receiving it as a taxable salary.

There is also the interesting proposition of providing additional employer pension contributions in lieu of a pay rise, creating a de-facto salary sacrifice scheme, albeit without the option for the employee to revert to a higher salary without the agreement of their employer. Could this be the next big thing? We certainly think it has that potential and would be happy to discuss this further.

We have put lots of salary sacrifice schemes in place for our clients and would welcome the opportunity to discuss this option further with any interested parties. We can also provide advice on the practicalities of operating a two-tier system where you have contributions that are subject to salary sacrifice and those that are not, a problem that payroll teams/providers will have to negotiate. Any amounts above the £2,000 limit are to be reported via payroll software.

Electric vehicles – pay-per-mile tax:

The Budget has also announced a new tax specifically for users of electric vehicles. Whereas drivers of fuel-operated vehicles currently pay around £25 billion in fuel duty, being automatically included into prices paid at the pump, to date drivers of electric vehicles have paid no equivalent duty. In the past, governments have been keen to incentivise a switch to electric cars, as part of a broader ‘green’ agenda to move away from the use of fossil fuels.

However, with uptake of electric cars now widespread, the Government is keen to ensure that the resulting loss of fuel duty is replaced. A 3p per mile charge will be introduced for electric cars (1.5p per mile for plug in hybrids) effective from April 2028 raising £1.4 billion for the government. Concerns have been raised that further transition to electric cars could be slowed as a result, as taxpayers face mounting costs on all sides. However, these additional costs may make the purchase of electric vehicles through salary sacrifice schemes even more attractive as employees try to find savings. We can advise on the implementation of these schemes.

A consultation on these proposed changes and how they will be implemented is currently live and closes on 18 March 2026.

Changes to the national living wage:

A further area of change impacted employment taxes are the changes to the national living wage (NLW) and national minimum wage (NMW). This is just the latest in a long line of increases made in recent years, increasing the cost to business of employing staff yet further. This is not just because of the additional cost of employee wages, but also the additional 15% employers NIC on top of that.

From 1 April 2026, the NLW for workers aged 21 and over will increase by 4.1%, from £12.21 to £12.71 an hour, yet another significant increase.

As with last year’s budget, even larger increases have been given to the NMW those aged 18-20 (an 8.5% increase, from £10 to £10.85 an hour) and apprentices and under 18s (a 6% increase, from £7.55 to £8 an hour).

This represents an increase of around £975 to the annual earnings of a full-time worker on the NLW. The NLW has rapidly increased over the last few years, and today’s announcement further continues that trend. For reference, the previous rates are as follows:

We have continued to hear from clients that the huge increases in NLW over recent years have not just affected the lowest paid workers, but also those in the grades and pay brackets above them. This is because the lowest paid have been catching up at a fast rate, creating pay disparity and meaning employers are having to push up wages throughout their organisations, to maintain an incentive for progression.

We have also heard that as the NLW increases, more employees paid just above that rate are excluded from salary sacrifice schemes as the gap between the lowest paid and those just above them narrows even further. We can provide advice and support on tax-efficient benefits and remuneration packages.

How can PKF Francis Clark help?

This can be an uncertain time for employers, already facing spiralling costs, but our team of experts are on hand to provide guidance on the impact of changes and keep you up to date with the latest developments. If you would like to reach out one of our team to discuss what the measures might mean to your business, and how we might be able to help, we would welcome you to contact us.

For more Budget insights visit our 2025 Budget Hub.