Pensions updates | February 2026

OBR expects employers to adjust pay and pension practices ahead of NICs reform

New analysis from the Office for Budget Responsibility (OBR) suggests employers are likely to change how they structure pay and pension contributions following the government’s decision to cap National Insurance contributions (NICs) relief on salary‑sacrificed pension contributions. From 6 April 2029, any salary‑sacrificed pension contributions above £2,000 a year will attract both employee and employer NICs (ordinary employer pension contributions will remain exempt from NICs).

The OBR anticipates that most employers will respond by reshaping reward structures rather than absorbing the extra cost. A key assumption is that employers will channel elements of future pay rises into standard employer pension contributions, which remain exempt from NICs. Employees are also expected to reduce their own pension contributions so that overall levels of pension saving remain broadly unchanged. This behavioural shift is forecast to begin before the policy takes effect, reducing the eventual tax revenue raised.

The OBR also considered whether employers might cut contractual salaries in exchange for higher employer pension contributions. It concludes that this is difficult to implement and constrained by existing rules, so the overall impact is expected to be modest. However, most members of defined contribution schemes are assumed to adjust their contribution levels to increase take‑home pay.

Beyond those directly using salary sacrifice, the OBR highlights several ways the policy’s cost could spread more widely:

• slower wage growth over time due to higher employer NICs;
• reductions in ordinary employer pension contributions; and
• downward pressure on salaries and bonuses.

As a result, employer responses and wider pass‑through effects are expected to significantly reduce the measure’s tax yield, cutting it by around half by 2030–31. While the policy is initially estimated to raise around £5bn a year, incorporating behavioural changes reduces the projected increase to £4.7bn in 2029–30, falling further to £2.6bn in 2030–31. The OBR assigns the costing a medium‑high uncertainty rating, reflecting the difficulty of predicting how employers will adjust pay and pension strategies in practice.