Pensions have been widely reported to be on the Chancellor’s radar for change in today’s Budget. Now we know what her thinking is (earlier than usual given the unfortunate OBR leak!), it’s time for advisers to think about how these impact clients and their financial plans.
In this section of our budget coverage, we’re drilling down into pensions and the implications of today’s Budget speech for advisers and their clients – especially on salary sacrifice changes.
Given the OBR leaked report early reportedly due to a technical error, we knew even before she even stood up that the Chancellor of the Exchequer in her Budget speech today would restrict the amount on which to obtain benefits through salary sacrifice. The change will apply to contributions into workplace pensions from April 2029 and is restricted to capping the NIC benefits to a £2,000 limit on combined employer and employee pension savings.
You can check out all the rest of our budget analysis, news and views on all the other non-pension measures relevant to advisers here on our dedicated Autumn Budget category
Experts have been reacting to today’s pensions news – particularly the salary sacrifice changes – in the budget as follows:
Gary Smith, senior partner and retirement specialist at Evelyn Partners, said: ‘This cap throws a spanner into the works of private sector pensions, where salary sacrifice is a crucial and valued feature of workplace schemes. At £4.7billion, the tax take is greater than expected and means the impact of this policy on pensions, pay or businesses – or all three – could be severe. Research earlier this year suggested that about 48% of all UK private sector companies offer salary sacrifice pension contribution systems, but at larger firms it was about 67%, and up to 85% for biggest employers.
‘Restricting salary sacrifice is a tax penalty on people trying to the right thing by saving efficiently for their own retirement and it’s yet another National Insurance cost increase imposed on firms, which may result in reduced pay and pension benefits for private sector employees. Some employers who currently pay more than the auto-enrolment minimum on behalf of their employees will be inclined to reduce their contribution rates or other employee benefits to adjust for these changes.
‘Under the current minimum auto-enrolment scheme percentage contribution rates, someone earning less than £40,000 a year will not be affected by these changes.
‘For those who earn more, it will depend on how firms react and how they manage their pension systems. It could be that many white-collar workers will just see their monthly NI bill go up and take-home pay go down if they study their payslip.
‘An individual earning £100k a year could have £393 a year less paid into their pension,if the employer based the contributions on 100% of salary and gave all of the NI saving back to the employee. For someone earning £200k, the figure rises to £708 less being paid into the pension. But if some contributions are done by salary sacrifice, and the rest not – will some firms just switch to a net pay system for instance?
‘As the government recently announced a pensions commission charged with trying to encourage greater private saving, this is a shot in the foot of that project, as it can only discourage workplace saving. And it will certainly be a blow for those who are using salary sacrifice to avoid punitive marginal tax rate steps like that at £100k, and people with variable pay like bonuses who often opt to sacrifice these in lieu of a highly tax efficient pension contribution.
‘But one thing this salary sacrifice crackdown won’t do is earn the Chancellor a backlash from the public sector, as a raid on tax-free cash would have done. It is politically convenient that public sector schemes do not generally operate on a salary sacrifice basis but rather operate as “net pay arrangements”.
‘A cap on employee salary sacrifice for pension contributions should therefore have little impact on the public sector, including all of the civil service and government-backed schemes, which will save this Government another run-in with the unions and vested public sector interests.
‘However, the upshot is that it will put a further wedge in the growing divide between private and public sector pensions. Restricting this sensible tax benefit that makes private sector saving more attractive adds insult to injury in a two-tier pension system where public sector pensions, underwritten by taxpayers, are hugely more generous and reliable than those available in the private sector.
‘It follows hot on the heels of another measure at the last Budget which removed one of the very few perks of holding a defined contribution pension pot – that any unspent assets could be left to loved ones without incurring inheritance tax. That “privilege” will be extinguished from April 2027 so together with today’s news you could be forgiven for thinking that there is a wilful negligence towards private sector pensions – except as a potential cash cow.”
Following the OBR publishing the Budget early, Steve Hitchiner, Chair of Tax Group at the Society of Pensions Professionals said: “Abolishing salary sacrifice for pensions will affect the take home pay of millions of employees – especially basic rate taxpayers – and is a tax on working people, in spirit if not in name. It is also another sizeable cost to employers and, perhaps most importantly its removal will reduce pension saving.”
Sam Grice, Founder and CEO of Octopus Legacy, said: “The £2,000 on tax-free pension contributions leaves many people unsure about how best to financially prepare for the future. The cap, alongside last year’s announcement that money left over from pension pots will be included in IHT calculations from 2027, are significant changes which may prompt people to review their long-term plans.
“Interestingly, we may now see an uptake in life insurance policies. Cover can be set at a fixed value, placed in trust, and paid out quickly upon death or critical illness. This means families may have more certainty regarding what will be available to them, and in which circumstances.
“I believe we’ll begin to see life insurance emerging as an increasingly practical tool, as pension rules continue to develop.”
Malcolm Reynolds, Aptia’s UK President, said: ‘There will be an inquiry into the OBR’s early release of its data. But for pension savers the torrent of pre-budget speculation about pensions taxation was far more damaging. The cap on salary sacrifice is unwelcome, but things could have been much worse. In the three months since the Chancellor announced the Budget date, there has been too much speculation and kite-flying about measures affecting the taxation of pensions. These included cutting the tax-free lump sum allowance and changing tax relief on contributions.
‘Had these measures been implemented, they would have significantly undermined confidence in pensions and negatively impacted savers’ outcomes. Some people will already have made hasty financial decisions, with many more now questioning whether their long-term plans could be disrupted in the future.
‘Each time the government tinkers with taxing pensions or trails potential cuts to allowances, it risks undermining pensions as the best way to save for retirement. Pensions are a long-term financial arrangement and shouldn’t be subject to short-term speculation before every Budget.
‘The government wants to get people saving more and has set up the Pensions Commission to deal with the UK’s looming pensions crisis. The annual pre-Budget guessing game will undermine these goals if it continues.’
Steve Hitchiner, Chair of the Tax Group at the Society of Pensions Professionals (SPP) said:
“Restricting salary sacrifice for pensions will affect the take home pay of millions of employees – especially basic rate taxpayers – and is a tax on working people, in spirit if not in name. It is also another sizeable cost to employers and, perhaps most importantly its restriction will reduce pension saving.”
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown, said:
“Salary sacrifice on pension contributions enables workers to get the full value of every pound through income tax and National Insurance savings. Restricting the amount of someone’s salary that can be sacrificed to £2,000 a year will make people feel that bit poorer and we could see less going into pensions as a result.
As an example, a worker earning £50,000 who saves 5% of their salary would miss out on savings of £40 per year. At a time when the government is looking to improve pension adequacy it seems counter intuitive to do something that could put people off boosting their contributions.
The cost to employers could also be substantial at £75 per year for someone earning £50,000 and £450 for someone earning £100,000. Multiply this across a workforce and the costs mount up quickly. It could lead to employers limiting salary increases or opting against increasing their own contributions beyond auto-enrolment minimums.
It’s a move that could have huge impacts on people’s retirements. A 22-year-old earning £25,000 per year receiving 3% per year as an employer contribution on top of their own 5% one would reach retirement with a pension pot of £226,000. However, if the employer had been able to boost their contribution to 5% the end result would be closer to £283,000.
At a time when there is such a focus on pension adequacy it seems counter intuitive to put barriers in the way to boosting contributions. Given the latest data from the HL Savings and Resilience Barometer shows only 43% of households are on track for an adequate retirement income we’ve clearly got more to do. The ongoing pension adequacy review needs to ensure that the appropriate incentives are in place to help people invest for their future and this change is a backward step.
Jamie Jenkins, Director of Policy at Royal London, said:
“As had been widely trailed and ultimately leaked, salary sacrifice for pensions will be limited to £2,000. However, it will not be effective until 2029, giving employers more time to make the necessary changes.
“Not all employers offer salary sacrifice and, of those that do, not all share the more substantial National Insurance (NI) savings. While there will be an impact on what is being paid into some people’s pensions, the bigger story may be the effective rise in employer costs, where the savings made on NI were being used for other purposes.
“While unwelcome, restricting salary sacrifice is perhaps the least worst outcome for pensions. Those being enrolled into a workplace pension will continue to benefit from full income tax relief and mandatory pension contributions. And for now at least, 25% tax-free cash. Amidst all the noise, let’s not lose sight of that.”
Lou Davey Head of Policy and External Affairs at the Independent Governance Group (IGG) said:
“By capping salary sacrifice the Chancellor has pulled the rug out from under one of the most effective and widely used ways for many savers to boost their pension pot, undermining the Pension Commission’s work and the Government’s own commitment to pension adequacy.
The clear message from industry ahead of the Budget was to give us stability to not risk undermining saver confidence. The Government has a clear desire for the pensions sector to help drive growth, but this move is counterintuitive by limiting the ability of pension funds to invest in UK assets and encouraging savers to make decisions they might regret in retirement.”
Mike Ambery, Retirement Savings Director at Standard Life, part of Phoenix Group, said:
“The Chancellor’s decision to cap salary sacrifice at £2,000 a year marks a significant shift in how people can save for retirement. Salary sacrifice has long been one of the most efficient ways for workers to boost pension contributions, so limiting it will inevitably increase costs and reduce take-home pay for many. The surprise today is that the changes will apply only to individual’s contributions and employer contributions will remain exempt from national insurance. While the change is significant it is less damaging than feared and potentially creates a number of options for people to maintain their level of saving. This will include negotiating higher employer pension contributions in return for lower pay although we will need to wait and see how this is implemented.
“This change will disproportionately affect private sector workers, as public sector schemes don’t usually use salary sacrifice. At a time when simplicity and engagement are critical to improving savings levels, adding complexity and reducing incentives risks undermining confidence in the system. It’s also vital that consideration is given to the timing of this change. The official papers highlight that no additional tax revenue is expected until 2029, pointing to a gradual implementation. In the meantime people will want to make use of arrangement to the full extent they’re able to. Employers will still face a considerable amount of administration to comply and will need to put thought into communication. It’s also still unclear how the mechanics of the new cap will apply when people move between employers – in all likelihood, this will add further complexity. Payroll systems will need to be updated, and employers will have to manage compliance across multiple schemes and employee movements.
“Pension saving depends on stability and trust, and frequent policy changes make people question whether the system works for them. This change comes as the Government revives the Pensions Commission to tackle the UK’s retirement savings gap – limiting salary sacrifice could undermine efforts to improve savings adequacy at a time when millions are already undersaving for retirement. Reforms should support the goal of ensuring people can retire with financial security, not hinder it.”
Jon Greer, head of retirement of policy at Quilter, said: “Introducing a £2,000 cap on National Insurance relief for pension salary sacrifice from 2029 is a deeply misguided move. At a time when the Government acknowledges that tomorrow’s pensioners risk being poorer than today’s, policy should be focused on incentivising saving and not dismantling one of the most effective tools we have.
Salary sacrifice has long been a cornerstone of workplace pension strategies, helping millions boost contributions and plan with confidence. Restricting it will inevitably lead to cutbacks. A survey of 267 of our customers in October found one in four (25%) said they would stop using salary sacrifice if tax benefits were reduced or removed, while nearly one in five (19%) said they would contribute less. That is a devastating prospect when we’re already sleepwalking into a retirement crisis. What the smorgasbord approach fails to recognise is that small tweaks can have huge behavioural impacts – and this one could harm millions of future retirements.
Employers will also feel the pain. After last year’s increase in employer National Insurance contributions, this represents a double whammy, removing flexibility to support staff saving and stretching reward budgets even further.
That’s significant sums stripped from pay packets and business budgets, funds that could otherwise be invested in long-term financial security.”
Ash Daniells, legal director at Kennedys Law, said: “Given the recent speculation, it is not surprising that changes to salary sacrifice have been announced, though it is welcome news that the changes will not come into force until 2029 – allowing sufficient time for advisers to plan. For employees (particularly those with higher salaries) the change could mean a reduction in the money arriving in the bank at the end of each month. As a result, it will inevitably discourage higher earners, in particular, from maximising their pension contributions.
It is difficult to reconcile the change with the widely held view that retirement planning has to improve. The FCA has previously highlighted concerns that by 2040, over 50% of people aged over 60 will need to rely on housing wealth to support their income. These changes will only make the situation more dire, with contributions to pensions expected to decrease. The change to the national insurance exemption will help the Government achieve short-term objectives, but at the detriment of future retirement planning.
James Dean, Pensions Partner at law firm Freeths, said: “The decision to cap salary sacrifice contributions to pension schemes will be incredibly unpopular across the pensions industry. Introducing this measure from 2029 risks sending the wrong signal at precisely the wrong time. With many people already struggling to save enough for their retirement, this policy could hugely discourage pension savings and undermine long-term financial security. Rather than incentivising individuals to build adequate retirement pots, it risks creating further barriers to saving.”
Claire Trott, Head of Advice at St. James’s Place, said: “Pensions cannot deliver long-term security if the rules keep shifting every few years. The changes to salary sacrifice announced in the Budget, placing a £2,000 limit on combined employer and employee pension savings, will add significant complexity. Thankfully, there is time to prepare, with implementation not expected until 2029, which should allow payroll systems to be updated and processes adapted.
“The OBR has acknowledged that some employers may look to adjust employment contracts to offset the impact of the change. However, it expects this to be limited in practice, largely because employment law requires any reduction in contractual pay to be agreed across the whole workforce, making such changes difficult to implement.
“The OBR go on to comment that employers will seek to pass on the cost of these limits to employees which will result in reduced contributions as well as reduced pay rises and bonuses. This will reduce the impact of this change, but moreover will mean that many employees will have a long-term impact on their take home pay, increasing the challenges on individual because of the cost of living”
David Brooks, Head of Policy at leading independent consultancy Broadstone, said: “The Chancellor’s announcement of a £2,000 National Insurance efficient threshold on pension contributions that can be made through salary sacrifice arrangement will be a huge disappointment for many employers and employees.
“It will lead to a higher tax bill for many pension savers who use salary sacrifice and, as we saw with behavioural changes through the cost-of-living crisis, this financial hit is ultimately likely to lead to further contribution cut-backs eroding pension savings. At a time when the Government has launched a Pensions Commission to solve the problem of pensions adequacy, it feels a retrograde and short-term measure.
“There are further consequences. For employers, hot on the heels of the National Insurance hikes at last year’s Autumn Budget, it will represent yet another increase in National Insurance rates in all but name. This will make some businesses consider their options in terms of future recruitment as well as the generosity of existing workplace pension arrangements and salaries.
“It is interesting that the salary sacrifice reforms will not be implemented until 2029. This will give the industry significant time to consult on the proposed changes as well as potentially to secure mitigating amends or effective workarounds to support long-term saving.”
Charlotte Ransom, CEO at modern wealth manager Netwealth, said: “Salary sacrifice is one of the most effective tools workers have to build a meaningful pension, and many employers rely on it to reward and retain staff. It has now been confirmed that workers making pension contributions via salary sacrifice will no longer earn National Insurance relief from April 2029 above an annual £2,000 threshold. Capping the amount that people can put tax-free into their pensions from their salary will inevitably result in companies scaling back support, leaving workers poorer in retirement. If the Chancellor wants people to pay more tax, this is the wrong place to look. Workers should be encouraged to use every legitimate tool available to manage their tax bills, from maximising pension contributions within existing limits to making full use of ISA allowances. Punishing prudence won’t fix the system, it weakens it.”
Steven Cameron, Pensions Director at Aegon UK said: “Today’s announcement of capping the National Insurance exemption on pension contributions through salary sacrifice to £2000 is a blow. From 2029, many employees will lose the extra boost they are currently getting to their pensions from National Insurance savings.
“Those sacrificing more of today’s salary for a higher contribution towards their retirement income may question why the Chancellor is penalising them. This comes shortly after the Government set up an independent Pensions Commission to look at how to ensure more people are saving adequately for retirement. And what’s clear is that too many people across the earnings spectrum aren’t saving enough to achieve an adequate income for their retirement.
“However, the change mustn’t be allowed to discourage people from saving in pensions for their future. Despite the salary sacrifice changes, the Chancellor confirmed pensions continue to offer the benefits of tax relief and a tax-free cash entitlement.
“This year, like last, there was extensive and harmful speculation that the Chancellor would cut entitlements to the tax-free lump sum. This remains intact with individuals able to take up to 25% of their pot tax-free, subject to a maximum of £268,275.
“There were also fears over cuts to the tax relief top-ups individuals receive on contributions made into pensions. Under the continuing system, the Government boosts personal contributions at your highest marginal income tax rate, up to a generous annual allowance of £60,000.
“Given pensions are long-term investments, which can’t be accessed until age 55 (rising to 57 in 2028), it’s important that people have confidence in these tax incentives, encouraging them to save for their futures.
“We can’t afford another year of Budget ‘hokey cokey’, which has led to some individuals taking pre-Budget actions they might later regret. We urge the Government to confirm no further changes to the pensions tax system, at least for this Parliamentary term.”
Rebecca Williams, Divisional Lead of Financial Planning at Rathbones, one of the UK’s leading wealth and asset management firms, said:
“Capping salary sacrifice at £2,000 is a blunt instrument that risks doing more harm than good. It would strip away a key incentive for employers to boost pension contributions, undermine efforts to tackle the retirement savings gap, and pile extra costs on businesses already under pressure. Worse still, it sends the wrong signal at a time when we should be encouraging long-term financial resilience, not making it harder. This isn’t just a technical tweak – it could have real-world consequences for workers’ futures and employers’ ability to offer competitive benefits.
“The cap also complicates efforts to stay below the £100,000 threshold, where personal allowance tapers and childcare benefits are lost. While personal pension contributions can help, they often require filing a tax return and dealing with HMRC.
“Stable pension policy is crucial to maintain trust and give people confidence to plan long term.”
James Floyd, managing director of Alltrust Services Limited, said:
“The government’s cut to salary sacrifice relief confirms a move away from supporting private retirement saving and towards short-term fiscal balancing. While not presented as a direct hit on savers, the impact is clear. Legal & General’s actuarial analysis already shows nine in ten people are failing to meet their retirement goals, and removing one of the few remaining incentives for disciplined long-term saving will only worsen outcomes.
“Stripping away NI efficiency removes the core advantage of salary sacrifice, narrowing the gap with SIPP funding and shifting more responsibility back onto individuals. This continues a pattern advisers see every day—later retirement ages, more volatile outcomes and growing recognition that the system no longer supports the retirement futures people were promised.
“Reducing the ability to save efficiently, limiting flexibility and diluting incentives effectively hard-wires later retirement into the economy. For many under 50, working well into their 70s will become a financial necessity. Meanwhile, public sector workers remain insulated within defined benefit schemes, widening the divide between those with guaranteed pensions and those without.
“Advisers will now need to recalibrate strategies and place greater emphasis on SIPP funding to provide control and resilience as employer-based advantages erode. The industry must also be clear: raising revenue today at the expense of long-term retirement security is not sustainable. Restricting saving incentives will mean more people working longer, facing greater financial insecurity in later life and ultimately relying more heavily on the state. Working people deserve a retirement system that supports, rather than penalises, those who save for their future.”
David Brooks, Head of Policy at Broadstone, said:
“Confirmation that the State Pension will increase by 4.8%, around £575 a year for those on the full new State Pension, takes the annual benefit right up to the brink of the frozen Personal Allowance threshold and will drag more retirees into paying Income Tax next year. The outsized increase to the State Pension will once more raise questions around the long-term viability of the Triple Lock given the accelerating cost to the Exchequer. With the State Pension Age review ongoing, it will be interesting to see if it makes any proposals beyond raising the age of receipt either higher or faster.
“As we head into Winter with the cost-of-living pressures still biting, the news will be reassuring for those pensioners who are largely reliant on the State Pension to provide the majority of their income.”
David Piltz, CEO at Gallagher Benefit Service, said:
“The Chancellor’s decision to leave the annual allowance and tax-free lump sum unchanged is welcome, however the annual threshold on saving for retirement through salary sacrifice is disappointing. This is not just a change that will affect the wealthy, £2,000 is approximately 5% of average UK earnings so this will make retirement savings more expensive for millions of workers, at a time when it is estimated that 40% of UK adults are not saving enough for a comfortable retirement.
“For employers, this will add significant cost, about a quarter of Gallagher clients reinvest salary sacrifice savings directly into their employees’ pensions, so the cap will inevitably result in lower levels of retirement saving. Whilst the deferred introduction until 2029 is welcome, this initiative will introduce another layer of complication to an already complex pension landscape.”
Andrew Zanelli, Head of Technical Engagement at Aberdeen Adviser, said:
“Aberdeen Adviser acknowledges the fiscal pressures facing the Government and the need for a balanced approach.
On pensions we would like to see a commitment to long term saving to put an end pre-budget hysteria which is eroding confidence in pensions and leading to poor client decisions. At the same time, we note that reforms such as restrictions on salary sacrifice, tightening of capital taxes, reductions to Cash ISA annual contribution limits, and changes to dividend taxation remain sensitive areas where proportionality is crucial for long-term planning and consumer confidence.
On restricting salary sacrifice for pension contributions (e.g., £2,000 NIC cap), he added, “While this change is undoubtedly disappointing for pension savers, a £2,000 cap on the NI benefits of salary sacrifice appears to be the least disruptive option considered in HMRC’s research last year and crucially people have four years to plan. Those affected will see a reduction in take home pay and in their eventual pension pot, particularly where employers have historically passed on their NI savings. Employees may in future need to contribute more either through workplace schemes or other savings vehicles to achieve the same retirement outcome.”
“There are also implications for advice businesses themselves. Higher employer NI costs will feed directly into adviser firm overheads and this increases pressure on margins at a time when Consumer Duty has already raised the operational bar.”
Phil Wadsworth, Aptia’s Chief Actuary, said:
“The Chancellor’s announcement that she would index pre-1997 pensions in the Pension Protection Fund and Financial Assistance Scheme is good news for those members who lost out when their employers went insolvent. But this measure could put further pressure on trustees of other schemes that similarly aren’t protected against inflation. Members of large occupational schemes are already lobbying MPs for their benefits to be indexed, and this measure could encourage them to press harder.
“This is a complex subject and in almost all cases trustees will be cautious about doing so, often because they don’t want to set a precedent or a potentially confusing expectation for members. Equally sponsors as well as the government were looking to spend these monies in ways to drive their businesses and the economy. But trustees should prepare for further enquiries by making sure they understand their scheme’s position and communicating empathetically with members.”
Michael Carter, Partner, Osborne Clarke, said:
“Some good news today is the expansion of EMI schemes – neatly aligning with the Government’s call for evidence on investing in smaller companies. EMI remains one of the most effective tools for attracting and keeping talent, and greater flexibility would be a real boost for growth. For fast-growing businesses widening the number of companies that can benefit from EMI could make a tangible difference to how they reward and retain key people.”
“Since the 2014 reforms, around 1,000 companies have moved to employee ownership. These latest changes risk undermining that progress by making the model less attractive and potentially discouraging shareholders from selling their businesses to their employees.”
“Charging NICs on salary-sacrificed pension contributions is clearly a significant revenue-raising measure – the OBR expects it to generate around £4.7bn by 2029/30, far more than many other headline changes. Whilst the move delivers short-term fiscal benefit, it also raises a broader question about how measures of this scale may influence long-term saving behaviour and retirement planning. Ensuring that short-term revenue priorities do not inadvertently discourage future pension saving will be an important balance for policymakers to strike.”
Yogesh Dhanak, Senior Technical Advisory Manager at ACCA, said:
“Salary-sacrificed pension contributions above an annual £2,000 threshold will no longer be exempt from NICs from April 2029 and therefore be subject to both employer and employee NICs.
“This demotivates employees from maximising their savings and preparing for the future as it taxes them further whilst increasing the cost to employers at a time when they have already been burdened with higher costs of doing business. The employment rates in the UK reflected this in October, as employers have struggled to grow and scale while fighting against rising costs.
“Raising revenue in the short term by discouraging long term private pension saving is arguably counterproductive, given the Chancellor has previously wanted more investment in UK based funds, taxing pensions more goes against this and take from future savings.
It will reduce future income for the oldest cohort in society; the social and welfare costs falling on the state of supporting pensioners who can’t support themselves are likely to outweigh any benefits felt now.”
Mike Ambery, Retirement Savings Director at Standard Life, part of Phoenix Group said:
“The chancellor has confirmed that the state pension will rise by an inflation-busting 4.8% in April, driven by the average earnings component of the triple lock. This will offer some short-term relief to those who continue to feel the squeeze of higher living costs, as the new state pension will be boosted by £574.50 per year and the basic state pension by £439.40.
“The commitment to keep the triple lock stays, for now, but there are significant questions around its long-term sustainability. The state pension is funded by the workers of today, and its costs are set to swell over the coming years as more of our ageing population reach state pension age. Any future reforms or changes to the triple lock will need to carefully balance its long-term affordability with the sizable political risks associated with changing a policy affecting millions of people.
“The state pension age review alongside the revived Pensions Commission, presents a unique opportunity to look at the pension system as a whole, including whether the triple lock continues to serve its intended purpose effectively.”
Zoe Alexander, Executive Director of Policy and Advocacy at Pensions UK, said:
“Over half of savers are on course to fall short of the retirement income targets set by the 2005 Pensions Commission. Applying National Insurance to salary-sacrificed pension arrangements above £2,000 will harm the economy, businesses and pension saving. In a recent survey of Pensions UK members, 75% of respondents said they believe savers are likely or very likely to alter retirement contributions or decisions as a result of the changes. More, not less, pension saving is needed if everyone is to have an adequate income in retirement.
“However, applying the changes from 2029 should at least give businesses time to prepare and we urge them to consider how they can maintain the generosity of their workplace pension arrangements to lessen the harm to savers’ retirement prospects.”
Mark Futcher, Partner and Head of DC Pensions at Barnett Waddingham (BW), said:
“The Chancellor’s decision to cut salary sacrifice will reverberate across workplaces. While it may raise extra NI revenue, it removes one of the most effective ways people boost their pension savings. With adequacy levels already worryingly low, this change will hit average earners hardest and increase cost pressures for employers at a time when budgets are stretched. It also runs against the aims of the new Pension Commission, which is focused on strengthening long term saving, not undermining it.
“And salary sacrifice goes beyond pensions. Parents use it to retain access to child benefits and funded childcare when they or a partner is deciding whether to stay in or return to work. This could present a significant barrier to people re-entering the workforce after periods of leave, worsening gender pay and pensions gaps.
“Sudden tax and insurance changes like these only create a lose-lose scenario for employers and employees – which we’re seeing play out in the employment data across the UK. We can only hope the Government recognises the damage this could cause and turns her attention to policies that make it easier for ordinary working people to build a secure retirement, not harder.”
Catherine Foot, Director of the Standard Life Centre for the Future of Retirement said:
“Pensions have long been subject to frequent and significant government intervention, with decisions made in one era often shaping outcomes for generations. While the Budget has announced what may seem like a relatively minor pension policy changes aimed at short-term revenue gains, it’s crucial not to lose sight of the bigger picture of addressing widespread under-saving and improving long-term retirement adequacy.
“With around 17 million people not saving enough for the retirement they expect or want, the recently revived Pension Commission presents a critical opportunity to take a step back, assess the broader retirement landscape, and confront the looming savings crisis head-on. The changes to salary sacrifice announced today introduce some bumps in the road for the Commission and could mean it has an even harder job to address the adequacy challenge.”
Steve Charlton, Managing Director of DC, EMEA and Asia at SEI Master Trust, said:
“Cutting salary sacrifice for pension contributions impacts employers the most, as they now look towards unwinding current arrangements and reverting to traditional contribution processes and contemplate a larger National Insurance bill in the future.
The timeframe for implementation of processes to account for the new caps shows some acknowledgement that time will be needed to help avoid creating a burden for employers and pension providers alike.
With a threshold set at £2,000 pa for salary sacrifice, there will be a minority of members that will be worse off—highlighting that the amount saved into pensions is woefully inadequate for the majority of workers.
Where contributions are more than £2,000 pa, the net impact on employees’ contributions will be neutral in many instances. However, there are employers that share the National Insurance savings with employees as additional pension contributions rather than seeing it as a windfall. As a result, these employees are likely to see a drop in contributions.”
Eliana Sydes, Head of Financial Life Strategy at Y TREE, said:
“The changes announced in today’s Budget are ultimately a matter of ‘little-and-often’ impact on wealth. A couple of percentage points more on dividends, changes to salary sacrifice on your pension contribution, a surcharge on £2m-plus homes, and frozen thresholds might sound modest in isolation. For some, the impact could be negligible. But for those whom many – or even all – of these changes apply, the Budget could make a material difference, especially when compounded over time.
“For example, younger higher-income professionals in London who make the most of salary sacrifice, and may have invested a large share of their capital in property, will have to change their approach to financial planning.
“The Chancellor has been smart – she recognises that a few small nibbles here and there add up, and so do we. It is hard to immediately see how each change compounds to impact your overall financial life without the right tools and knowledge. That is the heart of the Y TREE approach, which today’s Budget makes even more important.”
James Carter, Head of Platform Policy, Fidelity International, said:
“Salary sacrifice has long been a valuable benefit for both employers and employees, enabling individuals to boost their pension savings in a tax-efficient way. Reducing the tax-efficiency of pension saving at a time when it is generally acknowledged that consumers are not saving enough for an adequate retirement is a concern.
“This change, and the general uncertainty around the stability and sustainability of the UK pension system, emphasises the importance of the work of the Pensions Commission launched in July. It is essential to establish a long-term plan for pensions, considering the interaction of minimum contributions to workplace pensions alongside the State Pension. With today’s change due to come into effect in 2029, we welcome the opportunity to work together with government to look at how this will be implemented.
“Creating an environment that supports long-term financial security is essential for the future.”
Phil Jelley, pensions partner at Gateley Legal, said:
“The Government’s announcement of plans to cap the amount of pension contributions made via a salary sacrifice scheme will come as a disappointment to employees in the private sector across the UK. The scheme, where employees benefit from the National Insurance savings, has been capped at £2000 per annum from April 2029, which will result in the reduced pensions savings for employees, at a time when it is widely acknowledged that workers in the UK are under saving for their retirement.
“The introduction of the £2000 cap on pension contributions will lead to smaller pension pots for future retirees, meaning they will likely have a greater reliance on the state in retirement, which will place a greater strain on future generations who will inevitably need to fund that support.
“Following this change, against the backdrop of a struggling economy, employers will also seek to reduce their pension costs, resulting in reduced pension pots as well as potential reductions in pay increases and headcount.”
Hannah Gurga, ABI Director General, said:
“We recognise the government is facing challenging economic circumstances, and difficult decisions must be made. The nation’s savers, and our industry, need long-term policy stability to plan for the future with confidence.
“The changes to the salary sacrifice scheme are disappointing, especially at a time when we need to be encouraging people to save. This does the opposite and risks pushing millions of people into poorer retirements, something Government and industry have been working hard to avoid. However, the implementation date of 2029 will provide some relief to employers and payroll providers, giving them time to prepare and embed the changes.”
Yvonne Braun, Director of Policy, Long Term Savings, Health & Protection, at the ABI said:
“Capping salary sacrifice for pension saving is a short-sighted tax grab which will lower pension saving and undermine people’s retirement security. It also goes against the Government’s ambition to increase scale in pensions to drive more investments into UK businesses and infrastructure.
While it’s encouraging that employers and payroll providers will have until 2029 to make the necessary changes to their systems, the wider work required to rebuild people’s trust in the stability of pensions will take years.”
