Autumn Budget 2025: Salary Sacrifice contributions cap from 2029

In this year’s Autumn Budget, the Chancellor, Rachel Reeves focussed on a multitude of tax rises to address the fiscal gap in the UK economy. The budget concentrated on pensions in a few key areas.

Salary sacrifice cap for pension contributions

Following much speculation ahead of the Autumn Budget, the Chancellor has confirmed National Insurance will be charged on salary sacrifice pension contributions above £2,000 to both employees and their employer from April 2029. The government expects this change to raise £4bn - £5bn.

The exact impact will vary depending on how employers respond to the change. Implementation is expected to result in higher payroll costs for employers, lower take-home pay for employees and depending on how the salary sacrifice scheme is set up, less pension contributions being paid into employees’ pension schemes.

For example, an employee earning £40k per annum contributing 10% may see their take home pay fall by £160 per annum due to paying more in National Insurance. Similarly, the employer would need to pay £300 more in National Insurance for this one employee. 

The introduction of the new limit accompanied by the news of the minimum wage increase will add additional pressure to employers, especially following the rise in employer national insurance / decrease in the national insurance threshold earlier this year. Employers are likely to look at ways of recuperating these extra costs, which could result in a reduction in employer pension contributions, less spend on non-pension employee benefits and lower future salary growth for employees.

Sarah Garnish, a Consultant at Quantum Advisory, said:

“Over the past couple of years, we have seen the Government make a conscious effort to improve the UK’s pension system. The Pensions Bill will introduce a new framework to improve pension scheme value and outcomes for members, while the Pensions Commission has been reformed, to address the ever-increasing concerns that future retirees are on track to have lower retirement incomes.

The limit on salary sacrifice contributions, in isolation, will for many employees make it less likely for them to contribute more to their pension and could potentially lead them to reduce what they contribute. All of this is very counterproductive to the aims of the Government where they are looking to improve retirement outcomes for individuals. 

I would encourage employers to consider the impact of the change on their pension scheme and ensure that the impact on their employees is carefully communicated. The current structure of each employer’s pension scheme should be reviewed and I’d recommend alternative options which may help reduce the impact on employers and employees alike are explored. For example, it might be possible to restructure the pension scheme to make it non-contributory for employees – albeit the complications of this would need to be fully investigated.

The only silver lining is that these changes won’t come into effect until April 2029. This gives us time to explore creative solutions and possibly work towards having the proposed change stopped.”

PPF pre 1997 indexation

Following significant lobbying the Government has promised to use reserves (c. £14 billion as at 31 March 2025) held in the Pension Protection Fund (PPF) and Financial Assistance Scheme (FAS) for those that are in these schemes to start increasing pension in payment accrued prior to 6 April 1997 in line with the Consumer Prices Index capped at 2.5% from April 2027. This change would only apply where the original scheme provided an inflationary benefit on this pension originally.

According to trade union, Unite, there are around 400,000 retired workers (generally aged over 80) with pensions accrued solely prior to 6 April 1997 whose pensions have not received any inflation linkage. At this stage it is unknown how many of these members would be affected by the above amendment.

Sarah Garnish, a Consultant at Quantum Advisory said:

“The announcement from the Government is welcomed and, in my view, an excellent use of the reserves which have been built up by the PPF. In the last 10 years alone, the real value of these individuals’ pensions will have decreased by around 40%.

The Government should also be commended for acting relatively quickly in this area given that the main cohort affected are in their later years of life.”

Government confirms Triple Lock Increase for State Pension in April 2026

The Government has committed to applying the triple lock to the State Pension for 2025-2026 such that from April 2026 it will increase from £11,973 pa to £12,547.60 pa (equivalent to £241.30 per week). This increase reflects the growth in national average earnings over the year at 4.8% (compared to September CPI inflation of 3.8%).

Sarah Garnish, a Consultant at Quantum Advisory, said:

“An increase in the State Pension will be very much welcomed by pensioners although the debate around the triple lock mechanism will continue over the next few years.

The Office for Budget Responsibility have noted that the impact of the triple lock, in light of low recent economic growth, has pushed up annual Government spending by £12bn a year compared to if it increased in line with national average earnings. In a time when the Government is repeatedly asking for more money through various means, this is applying significant political pressure with both Conservatives and Reform refusing to rule out amending it in the future.

Separately the State Pension will in 2027/2028 exceed the lowest tax-threshold resulting in pensioners who receive it as their only source of income being subject to tax charges.”