Budget 2025: Rachel Reeves Considers Changes to Pension Salary Sacrifice Schemes
As the Budget 2025 approaches, Chancellor Rachel Reeves is reportedly weighing changes to pension tax rules, with a specific focus on salary sacrifice schemes rather than broad cuts to the pension tax-free cash allowance.
Salary sacrifice allows employees to give up part of their salary in exchange for increased employer pension contributions, thereby lowering their taxable income and national insurance contributions (NICs). This mechanism benefits employers and employees but can also affect entitlement to child benefits.
One proposal under consideration is capping the earnings eligible for pension contributions made via salary sacrifice at £2,000, potentially raising up to £2 billion annually for the Treasury. For example, on a £55,000 salary, this cap would reduce take-home pay and alter employer NIC savings.
Experts warn that reducing these incentives might undermine retirement saving efforts, especially given concerns that around 15 million people are not saving enough for retirement.
Regarding the pension tax-free cash, currently set at 25% of pension pot value up to £268,275 from age 55 (rising to 57 from April 2028), the Treasury is reportedly ruling out any reductions to this limit for now.
Pension tax relief, the government top-up typically amounting to over 20%, costing an estimated £50bn–£60bn, does not appear to be a focus area for changes in this budget.
Overall, no firm decisions have been made yet, but current speculation emphasizes reforms to salary sacrifice arrangements rather than broad limitations on pension tax-free cash.
