Salary sacrifice is a popular way to boost pension savings. Employees give up part of their salary, and their employer pays the equivalent amount into their pension. The big win? Both employee and employer save on National Insurance contributions (NIC), making it a hugely tax-efficient strategy.

Change is however on the horizon. From April 2029, the government will cap the NIC exemption on salary sacrifice pension contributions at £2,000 per year. Anything above that will attract employee NICs at 8% for earnings under £50,000 and 2% above that, thereby reducing those generous savings.  In addition, employers NIC at 15% would become due on the excess salary sacrificed.

Any amounts above the limit must be reported by the employer through their payroll software, showing the total amount sacrificed, this ensures accurate reporting under HMRC’s payroll requirements.

Salary sacrifice will however still make sense in the majority of cases. Employees will still benefit from tax relief on the amount sacrificed and indeed the sacrificed amount will still be a valuable planning tool for those seeking to remain below certain thresholds – for example below £100,000 of adjusted income in order to retain personal allowances, tax free childcare entitlement and 30 hours free childcare.

Before you panic, remember: April 2029 is more than three years away. That’s practically a lifetime in political terms so this could still change. For now, it’s a heads-up, not a handbrake.

Inheritance Tax: The Big Shift

What hasn’t changed and is now much closer is the inclusion of pensions in the Inheritance Tax regime (IHT) from April 2027. Pension pots will soon be considered as part of your estate for inheritance tax purposes, in some cases significantly increasing the inherent IHT liabilities should a loved one die.  The days of pensions as a neat tax shelter for passing on wealth are numbered, so planning ahead is essential.

Planning Tip: Use Surplus Income Wisely

If you’re earning more income (including pension income) than you need for everyday expenses, consider making regular gifts from surplus income as part of your inheritance tax planning. These gifts can qualify for the “normal expenditure out of income” exemption, provided they are regular, evidenced and do not affect your standard of living.

Where pension income is currently not needed, it may be possible to draw additional amounts on an annual basis in order to increase your overall income and increase your gifting utilising this valuable exemption.

It’s smart and effective for IHT planning, as these gifts are immediately outside your estate for IHT purposes unlike lump-sum gifts above your annual gift allowance (£3,000 for 2025/26), which are treated as Potentially Exempt Transfers and require surviving seven years to be exempt from IHT.

Of course other avenues may exist to minimise your liabilities and bespoke planning here is essential.

Final Thought

The Budget may feel like a game of financial juggling, freezes here and there but the message is clear: start planning now. Waiting until 2027 to act could mean missing opportunities today, please get in touch with your usual Shaw Gibbs contact for inheritance tax planning.

If you need any guidance on RTI reporting requirements for payroll, we can connect you with our payroll team for expert support.