Rumours of changes to salary sacrifice pensions in the Autumn Budget have sparked concern across the industry. In the following analysis, Chris Eastwood, Founder and CEO of digital pensions specialist, Penfold, reminds us why cutting this valuable tax incentive might offer a short-term boost to Treasury coffers, but it risks undermining long-term pension adequacy for millions and sending the wrong message to employers and savers alike.
Rumours that the Chancellor may target salary sacrifice pension schemes in the Autumn Budget should concern every employer and worker in the UK. HMRC’s recent surveys hint at potential changes to the tax treatment of these widely used benefits —an alarming prospect at a time when long-term financial security is already under serious strain.
We all know that the Chancellor needs to raise revenue, but salary sacrifice isn’t a loophole or a luxury—it’s a smart, scalable investment in the UK’s future pension health. National Insurance relief through these schemes may cost the Treasury today, but it channels money directly into workers’ pension pots, building long-term resilience in a country facing a growing retirement savings gap.
Widening the retirement savings gap
And, worryingly, that gap is widening. Recent data shows the percentage of workers on track for a moderate retirement has fallen sharply, with average households now £34,000 short of the savings needed to maintain even a modest standard of living in retirement. Slashing salary sacrifice incentives might deliver a short-term fiscal boost, but it risks long-term pension adequacy for millions.
It’s important to note that this isn’t just a big business issue. While HMRC’s data shows that larger employers remain the primary adopters of benefits-in-kind, the new wave of pension providers has democratised access. Small and mid-sized businesses—many in growth mode—are now embracing salary sacrifice to offer better benefits and boost employee retention. Limiting the associated tax relief now would disproportionately hurt these employers and reverse progress in pension inclusion.
Another blow to cash-strapped workers?
There is also no getting away from the fact that, amid the ongoing cost-of-living crisis, removing or reducing this tax benefit would feel like a stealth pay cut for many workers. Salary sacrifice boosts the value of take-home pay because employees get more into their pension pots while paying less tax. For younger or lower-income earners, who often need that extra incentive to save, taking this away could discourage engagement with retirement savings altogether.
Mixed messages from the government
As someone working in the pensions industry, I hear directly from employers who view salary sacrifice as a vital part of their engagement and retention strategy. Undermining this sends entirely the wrong message. It risks eroding employee trust just as businesses are trying to rebuild it.
More broadly, it contradicts the government’s own messaging on financial resilience, workplace savings, and personal responsibility. If ministers are serious about tackling the UK’s “silent savings crisis,” this is the wrong lever to pull.
The Chancellor faces difficult decisions. But punishing businesses and workers for planning ahead isn’t sound economics, it’s short-sighted politics.
