As part of the Autumn Budget 2025, the UK Government announced changes to the way that the UK’s salary sacrifice scheme works.

These changes will significantly impact the savings strategies of thousands of UK residents, and many of these strategies will need to be updated or revised to continue delivering the greatest possible benefit.

In this article, we will explain what is changing with the UK’s salary sacrifice scheme, how these changes will affect UK savers, and when these changes will come into effect.

Please note: Sheffield Mutual are not tax experts. Please consider contacting a financial adviser if you require any advice.

What Is Salary Sacrifice?

Salary sacrifice is an agreement between an employee and an employer under which the employee reduces their salary and receives additional benefits instead.

Salary sacrifice can be used to provide a wide range of benefits, including company cars, cycle-to-work schemes, and childcare vouchers. Some employers even use salary sacrifice to provide benefits such as gym memberships or additional holiday hours.

However, one of the most significant uses of salary sacrifice is for pension contributions.

Salary sacrifice into workplace pensions has historically been an attractive option for a range of businesses and employees.

Because tax and national insurance contributions are calculated based on an employee’s salary after deductions, sacrificing money from your salary into your pension has meant that both the business and employee pay less in National Insurance (NI) and tax.

How Is The Salary Sacrifice System Changing?

Recently, the Government has changed how salary sacrifice works.

Specifically, the new rules outlined in the Autumn Budget 2025 have introduced a £2,000 cap on the amount that can be contributed to a pension before National Insurance is due.

This means that after £2,000 has been sacrificed, any contributions will be subject to National Insurance.

This will make salary sacrificing large amounts into a workplace pension less attractive for both businesses and employees, as one of the key benefits of the salary sacrifice scheme will now be significantly more limited than before. 

Why Is This Change Being Made?

The change to the UK’s salary sacrifice rules is part of a broader set of changes designed to increase the amount of money the UK Government can raise.

Previously, it was common for people to contribute significant amounts of their salary to their pension pot, thereby avoiding obligations such as higher tax burdens and National Insurance contributions.

By limiting the amount of money that can be sacrificed to pensions, the Government hopes that people will choose new ways of investing or pay more in National Insurance if they continue to make their salary sacrifice pension contributions.

When Is This Change Coming Into Effect?

Although this change was announced in the Autumn Budget 2025, it will not take effect until April 2029.

This has been organised so savers can adjust their savings plans and develop new strategies to continue saving without being affected by changes to the salary sacrifice rules.

What Alternatives Are There To Salary Sacrifice?

Although there are no specific products that reduce National Insurance obligations and income tax in the same way that a salary sacrifice scheme does, there are still a range of products available that allow your money to grow without incurring additional tax obligations.

The most well-known of these savings products is the ISA, or Individual Savings Account. 

These accounts generate interest or profits, depending on the type of ISA, and the funds generated are generally tax-free for most UK citizens.

In fact, the Autumn Budget 2025 also made some changes to the way ISAs work as well; although people’s annual ISA allowance will remain at £20,000, only £12,000 of this allowance can be contributed to a Cash ISA for those under the age of 65. The remainder would need to be invested in an alternative, such as the Stocks and Shares ISAs offered by Sheffield Mutual.

In addition to opening an ISA, Sheffield Mutual members can open a Tax Exempt Savings Plan.

This is a type of savings plan unique to friendly societies like Sheffield Mutual, which allows you to make regular contributions over time. Like ISAs, the money earned in these plans are tax free.

Please note: Tax treatment depends on individual circumstances and may be subject to change in future.

Discover A Range Of Tax-Efficient Savings Options With Sheffield Mutual

At Sheffield Mutual, we work hard to provide our customers with a range of savings options to suit their needs.

If your current savings strategy relies heavily on salary sacrifice to top up your pension, now is the time to consider updating it so you can continue saving efficiently.

If you are looking for a new savings strategy, use our product selector to identify the best option for your savings goals.

Alternatively, if you’d rather speak to someone about your savings options, contact us on 01226 741 000 and our friendly, helpful team will be happy to answer any questions you may have.

This article provides generic information and the writer's opinions and should not be relied upon for investment decisions. Sheffield Mutual has provided no advice. If you doubt whether a savings or investment plan suits you, consider contacting a financial adviser for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting www.unbiased.co.uk or www.vouchedfor.co.uk. Advisers may charge for providing such advice and should confirm any costs beforehand.