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The Autumn Budget 2025: Bingo and horse racing are safe, but what about pensions?
After months of speculation, Rachel Reeves has delivered her second Budget, with as-expected changes that will find higher earners feeling the pinch. In our latest pensions insight, we explain how this Budget will affect the pensions landscape.
Reeves has previously acknowledged that the economy “feels stuck”: persistent high prices are dampening economic growth and GDP per head is only 0.8% higher than pre-pandemic levels almost six years ago. She was bound by Labour’s manifesto promise to “not increase taxes on working people…increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT”, but needed to plug a black hole of £22 billion, where £1 in every £10 of Government spending is used to pay interest on the national debt.
SALARY SACRIFICE
The biggest change for pensions is the Chancellor’s cap on the National Insurance Contributions (NICs) exemption for salary sacrifice on pension contributions.
When salary is sacrificed to pay pension contributions the employee’s gross salary is reduced, resulting in lower NICs liabilities for both employer and employee. Another advantage for employees is that they obtain full income tax relief on contributions, as opposed to relief at source where they only automatically benefit from 20% relief and have to claim any additional rate tax directly from HMRC, which many employees fail to do.
A recent Pensions Age report found that 2.3 million UK savers - around a quarter of taxpayers in those bands - aren’t claiming their entitlement to additional tax relief on their pension contributions.
Currently there is no limit on the NICs relief available when an employee sacrifices salary in return for increased, NICs-free employer contributions. From 6 April 2029, however, the exemption will be capped at £2,000 per annum (which equates to a 5% contribution for an employee with a £40,000 salary).
This will attract NICs on both sides of the ledger — at 8% for employees up to £50,270 of pay (and 2% above that) and 15% for employers – raising an estimated £4.7 billion in 2029-30 and £2.6 billion in 2030-31.
SO WHAT IMPACT WILL THIS HAVE ON BUSINESSES AND THEIR EMPLOYEES?
We are already in a weak labour market, with unemployment rising; this change could worsen the situation. It may also damage long-term pension savings for millions of workers, storing up problems for the future and an erosion of trust in a pensions system that is already under considerable pressure.
The new cap will force higher contributors and employers to factor NICs into the cost of pension saving, potentially triggering a redesign of reward structures and contributions or even cutting the employee headcount.
However, salary sacrifice is a contractual arrangement; it’s not something that can simply be unilaterally “unwound” by an employer. Changes to existing arrangements will require planning and following the usual processes for amending employment contracts.
Limits to salary sacrifice will also have a detrimental effect on women’s pension savings at a time when they already have to work 19 years more than men to reach the same retirement goal, according to the horrifying statistic released by the recent Gender Pensions Gap report from the Pensions Policy Institute.
Historically, salary sacrifice has provided a modest but valuable way to sustain pension saving through parental leave, which is still predominantly taken by women. While employers continue to pay contributions during parental leave, employee contributions fall in line with reduced pay. Any change that restricts salary sacrifice, and a corresponding shift from employer to employee contributions, will disproportionately dent women’s pension pots.
SO WHAT CAN BE DONE?
For now, probably nothing. The change isn’t due to be introduced until April 2029, and a lot can happen between now and then! Assuming the change happens as proposed, employers and trustees will need to take action and we’ve put together some thoughts on what that may look like.
One solution could be to switch to a non-contributory pension arrangement under which employer contributions only are made to the pension scheme. There are rules around how and when an arrangement like this can be used, however, so careful thinking will need to be done before implementing any such planning.
Administering a cap on a salary sacrifice arrangement and making the resulting NICs deductions from salary will not be straightforward, particularly where contributions are a percentage of salary and salary changes from pay period to pay period as it will do for many workers on flexible arrangements or who work overtime.
Trustees, employers and administrators may also need to update their scheme communications and payroll processes, and to prepare themselves for members to change their pension saving behaviour as the cap bites.
Get in touch if you would like to talk to us about how to manage this change with your workforce or pension scheme members. We have a dedicated Employment team that works alongside our Pensions team to support clients through changes like this.
NO CHANGE FOR OTHER PENSIONS TAXES
The State pension is set to rise by 4.8% on 6 April 2026 as Reeves reaffirmed the Government’s commitment to the triple lock on state pensions, ensuring that increases are linked to the higher of inflation, earnings growth or 2.5%.
Tax relief on pensions remains unchanged, despite the cost to the Government of around £50 billion to £60 billion per year. Despite fierce rumours that triggered the withdrawal of £10.4 billion of tax-free cash in the six-month period to March 2025 - nearly 75% higher than in the same period to March 2024 - the right to tax-free cash at retirement (by way of PCLS or uncrystallised funds pension lump sum) remains.
Similarly, no changes were made to the availability of income tax relief on pension contributions.
OTHER, LESS EXCITING, CHANGES
From January 2027, the Pension Protection Fund and the Financial Assistance Scheme will provide CPI-linked increases, capped at 2.5% on pre-1997 benefits where the original schemes provided such benefit. This change comes as the PPF is in surplus, improved scheme funding positions have reduced reliance on these rescue schemes, and the PPF levy is set at zero for the 2025/26 financial year.
The government will transfer the Investment Reserve Fund of the British Coal Staff Superannuation Scheme to its trustees. Following the privatisation of the coal sector, the Government guaranteed the scheme’s liabilities and became entitled to draw on the surplus in the Investment Reserve Fund. The current surplus - untouched since 2015 - will now be applied wholly for the benefit of the members.
Income tax marginal rate bands have been frozen until April 2031, meaning that anyone receiving a pay rise is more likely to fall into a higher tax bracket, and the inheritance tax nil-rate band (soon to feature much more frequently in conversations about pensions) also remains frozen.
And last, but not least, bingo duty has been abolished from April 2026 and horse racing bets are excluded from the tax increases on other remote betting.
Please get in touch if you would like to discuss any of the changes referred to above.