Rumours are currently swirling about a dramatic cap on salary sacrifice pension benefits in the forthcoming Budget, which some have dubbed a stealth tax rise in Employer National Insurance. This could potentially see the allowance slashed to just £2,000 a year.
Salary sacrifice is a formal agreement between an employer and employee in which the employee voluntarily gives up part of their gross salary in exchange for a non-cash benefit.
Because the exchange happens before tax and National Insurance are calculated, both parties typically save on NI contributions.
Businesses also worry that if pensions are first, will electric car schemes be next? Any such extension would hit employers again — and deliver a serious setback to the UK’s green ambitions.
There is also major uncertainty around when any changes would take effect. They could be introduced immediately on Budget Day, or deferred until 6 April 2026.
If it’s the latter, businesses may rush to put salary sacrifice arrangements in place before the window closes.
Luke James, Tax Director at Sheffield-based Gravitate Accounting, said: "In today’s tight labour market and cost-sensitive business environment, removing or capping salary sacrifice will strip employers of a crucial flexibility lever when they need it most.
"Salary sacrifice is vital right now because it’s one of the few tools employers have to manage rising costs while still offering competitive, meaningful benefits. With wage pressures high, inflation still biting, and talent harder to retain, salary sacrifice allows firms to reduce employment costs through lower Employer NI.
"It also means they can offer stronger benefits (like pensions or EV schemes) without increasing payroll spend. Crucially, it enables companies to support employees’ financial wellbeing in a tax-efficient way. It helps companies stay competitive in recruitment when outright pay rises aren’t affordable."
Philly Ponniah, Chartered Wealth Manager at Philly Financial, said any cap on salary sacrifice would feel like a tax hike in disguise, not a move toward fairness.
She said: "Salary sacrifice is one of the few tools that helps employers manage costs while helping staff save for their futures. Cutting it to £2,000 wipes out its value and forces firms to rethink their whole reward strategy. The ripple effects are real. If pensions are hit today, electric car schemes could follow, which would push up employer costs again and slow progress on greener transport.
"Parents earning around the £100k mark also face fresh uncertainty because salary sacrifice often keeps them eligible for funded childcare hours. The cliff edge is the difference between losing up to £9,500 or not.
"The timing question only adds stress. If changes happen on Budget Day, businesses will have no time to prepare. If they start in April, there will be a rush to set up arrangements before the door closes. Firms need stability, not surprise rule changes.”
Benjamin Woodhouse, Co-owner at Leighton Buzzard-based Balguard Engineering Ltd, said the whole thing looks like a headline grab with little thought behind it.
He continued: "My immediate concern would be finding the data on how many of the brand new cars we see on the road are leased and how many are via a salary sacrifice scheme.
"Perhaps, for some, this is to get staff out of a higher rate tax bracket, but I suspect in general it's more a helpful tool to help people who lease cars generally to get a new car every three years.
"Whilst Labour may well generate a small revenue tax gain per person by closing this door, there could be an unforeseen consequence to the car industry that will ultimately mean this is destined to be a non-starter when they look at it more fully.”
Michelle Lawson, Director at Fareham-based Lawson Financial, was withering: “How anyone can plan beyond tomorrow now is beyond me. The levels of uncertainty and instability are pretty much unmanageable. It also demonstrates the Government's lack of business acumen.
"Businesses plan ahead months, often years in advance around progression, investment and resource and the Government may be about to throw further spanners into the works. This will have a bigger cost than the tax as employers scale back further.
“Salary sacrifice benefits are tax-efficient but also help protect the workforce and keep them medically fit and in work. It could further prevent the migration of staff through job moves as they protect the benefits they have.”
