Autumn Budget 2025—the pensions angle

The Budget also included a few surprises: allowing easier payment of surplus directly to members in certain circumstances, addressing some issues in the previous proposals to bring pensions into the scope of inheritance tax (IHT), and promising increases on pre-97 pensions in the Pension Protection Fund (PPF) and Financial Assistance Scheme (FAS).

Salary sacrifice—what is changing?

Salary sacrifice allows employers to agree to reduce an employee’s salary in return for a benefit, which can include the employer making contributions to a pension scheme on the employee’s behalf. Currently, no employment income tax or NICs are paid on those contributions.

The Budget announced that, from April 6, 2029, the amount of contributions made via salary sacrifice that is exempt from NICs will be capped at GBP2,000 a year. Salary sacrifice contributions above this amount will be subject to employer and employee NICs. Non-sacrifice employer pension contributions will continue to be free of NICs. All contributions through salary sacrifice will remain eligible for relief from income tax (subject to the usual limits).

What will the salary sacrifice cap mean for pension schemes and employers?

Schemes and employers will need to digest the changes and think about how they affect their specific arrangements. A key question is where the cost of the additional NICs is going to fall—are employers willing to absorb that cost? If not, how will that be accounted for in employee benefit packages as a whole? Do employers want to move away from offering salary sacrifice? If pension contribution levels change as a result of restructuring benefit arrangements, consideration needs to be given to past communications and possible consultation requirements. Whatever the outcome, clear communication with employees is going to be key. The relatively long lead-in time is good news in allowing for the gradual adjustment of strategies where required.

What does the Budget say about pension surpluses?

It seems that calls to allow members to benefit more directly from the government’s plans to allow extraction of surplus from defined benefit (DB) schemes, without suffering punitive tax charges (as is currently the case), have been heard: the Budget states that “the government will enable well-funded DB pension schemes to pay surplus funds directly to scheme members over the normal minimum pension age, where scheme rules and trustees permit it, from April 2027” and is looking at “reducing the tax charge on surplus funds paid directly to members”. The intention is to make it easier for trustees and employers to agree packages of measures for surplus extraction.

What about IHT?

In relation to the government’s previously announced proposals to bring pensions into scope of IHT, the Budget suggests that some concerns around the burden being placed on personal representatives (PRs) are being addressed. It states that PRs will be able to direct pension scheme administrators to withhold 50% of taxable benefits for up to 15 months and pay IHT due in certain circumstances, and PRs will be discharged from any liability for payment of IHT on pensions discovered after they have received clearance from HMRC. This will be legislated for in the Finance Bill 2025-26 and take effect from April 6, 2027.

What else is changing?

The Budget also announced a change in compensation provided under the PPF and FAS from January 1, 2027, to provide CPI-linked increases, capped at 2.5% a year, on pre-1997 pension accruals where members’ former schemes provided it. Other announcements included a commitment to the triple lock on state pensions for the duration of this parliament.

Next steps

While we await draft legislation on these changes (which will come ‘in due course’), schemes and employers should begin to consider their response and how to respond to queries from employees and scheme members, which may be prompted by the Chancellor’s announcements.