Understanding the Impact of New £2000 Salary Sacrifice Legislation for the 2026-27 Tax Year

The UK government is introducing a significant change to salary sacrifice arrangements starting in the 2026-27 tax year. From this period, employees will face a £2000 maximum limit on salary sacrifice contributions for certain benefits. This change will affect how employees and employers approach salary sacrifice schemes, which have been popular for tax and National Insurance savings. Understanding this new legislation is essential for anyone using or considering salary sacrifice options.

What Is Salary Sacrifice and Why Does It Matter?

Salary sacrifice is an arrangement where an employee agrees to reduce their salary in exchange for non-cash benefits from their employer. Common examples include pension contributions, childcare vouchers, cycle-to-work schemes, and company cars. The main advantage is that both employees and employers can save on income tax and National Insurance contributions.

Before the new legislation, there was no fixed upper limit on how much salary could be sacrificed for these benefits, allowing some employees to make large contributions and gain significant tax advantages.

Details of the New £2000 Limit

Starting from the 2026-27 tax year, the government will cap salary sacrifice contributions at £2000 per tax year for specific benefits. This cap applies to salary sacrifice arrangements related to:

• Childcare vouchers

• Cycle-to-work schemes

• Other non-pension benefits that qualify for tax relief

  
  

It is important to note that this limit does not apply to pension contributions made through salary sacrifice. Pension schemes will continue to enjoy their existing tax advantages without this cap.

Why Has the Government Introduced This Cap?

The government’s goal is to reduce tax avoidance and ensure fairness in the tax system. Salary sacrifice schemes have been used by some higher earners to reduce their taxable income significantly, sometimes beyond what was originally intended by the policy.

By introducing a £2000 cap, the government aims to:

• Limit excessive tax savings from salary sacrifice on non-pension benefits

• Simplify tax rules around employee benefits

• Encourage fairer tax contributions across income groups

  
  

How Will This Affect Employees?

Employees who currently use salary sacrifice for benefits like childcare vouchers or cycle-to-work schemes will need to adjust their contributions to stay within the new £2000 limit. For many, this means:

• Reviewing current salary sacrifice arrangements before the 2026-27 tax year

• Considering alternative ways to fund benefits that exceed the cap

• Understanding that pension contributions via salary sacrifice remain unaffected

  
  

Example Scenario

Jane currently sacrifices £3000 annually for childcare vouchers through salary sacrifice. From 2026-27, she will need to reduce this amount to £2000 or less to comply with the new rules. If she wants to continue supporting childcare costs beyond £2000, she may need to pay the extra amount directly from her net salary without the tax advantages.

What About Employers?

Employers will need to update their payroll and HR systems to enforce the new £2000 limit. This includes:

• Monitoring employee salary sacrifice contributions to ensure compliance

• Communicating changes clearly to employees

• Adjusting benefit offerings if necessary

  
  

Employers should start planning now to avoid disruption when the legislation takes effect.

Benefits That Are Not Affected by the Cap

It is crucial to understand which benefits are excluded from the £2000 salary sacrifice limit:

• Pension contributions: No cap applies here, so employees can continue to sacrifice salary for pensions without restriction.

• Other benefits not qualifying for tax relief: These may not be subject to the cap but should be reviewed case-by-case.

  
  

Practical Tips for Employees and Employers

• Employees should review their current salary sacrifice agreements and calculate if they exceed the £2000 limit.

• Employers should audit existing salary sacrifice schemes and prepare to update payroll systems.

• Both parties should communicate openly about the changes to avoid confusion or unexpected tax bills.

  
  

Potential Challenges and Considerations

• Employees who rely heavily on salary sacrifice for benefits may see a reduction in their tax savings.

• Employers may face administrative burdens updating systems and policies.

• Some employees might choose to reduce participation in salary sacrifice schemes, affecting benefit uptake.

  
  

Looking Ahead: Planning for 2026-27 and Beyond

The new £2000 salary sacrifice cap signals a shift in how employee benefits are taxed and managed. To prepare:

• Start conversations between HR, payroll, and employees early.

• Consider alternative benefit options or direct payments where salary sacrifice is limited.

• Keep informed about any further government updates or clarifications.