Chris Curry is director of the Pensions Policy Institute
After all of the speculation and trailing of ideas, there was very little unexpected in the 2025 Budget, and pensions was no exception.
Very difficult choices had to be made, and it was always unlikely that pensions would escape completely from this, even though both the Pensions Schemes Bill and the new Pensions Commission are seeking ways to increase the amount of money that future generations will have to support themselves in retirement.
Current pensioners fared a little better – the commitment to the triple lock was retained for another year, and there were some welcome additional benefits for some members of schemes that are in the PPF, and members of the former British Coal Staff Superannuation Scheme (BCSS). But even pensioners will suffer from the extended continuation of fiscal drag from the freezing of the income tax personal allowance.
Fiscal drag was a key feature of this budget, and it is so powerful, that before the end of this Parliament it is likely that individuals who only have income from the State pension will be above the personal allowance. The Government have pledged that people who find themselves in this situation will not have to pay income tax, but it has yet to be determined how this will work.
While the complete removal of salary sacrifice for pension contributions was mooted, instead a cap on eligible contributions was announced at £2,000, to be introduced in 2029 – an option that the HMRC tested with employers in 2023, with the results published in 2024.
While the complete removal of salary sacrifice – in line with other changes to a variety of non-pension salary sacrifice schemes made in 2017 – would have raised more money, but potentially been more controversial, the cap option certainly retains complexity. And the delayed implementation in 2029, will give plenty of time to adjust.
The introduction of the cap will not directly affect many of those who currently benefit from these arrangements but will still mean a significant increase in NI contributions for employers and employees.
For example, an employee with current median gross annual earnings of £39,039 and sacrificing 5% of their salary (broadly in line with the automatic enrolment minimum) in lieu of pension contributions paid by their employer will see no impact to their take home pay. However, this is another area where fiscal drag kicks in. Given the delay in introducing the change, based on the OBR's underlying assumptions, by 2029 a median earner may well start to see an increase in their NI contributions.
The interaction of fiscal drag with both the state pension and salary sacrifice caps makes pensions even more complex, and not just for higher earners. This will affect pensioners only on the state pension, and some median earning employees as well.
The largest impact the measure will have upon employees is for those earning at the Upper Earnings Limit, £50,270 a year. An employee earning £50,270 sacrificing 5% of salary will be £41 a year worse off a year (and the employer pays an additional £77 NI a year) and when sacrificing 10% of salary a year will be £242 a year worse off (with the employer paying an additional £454 NI a year).
But that is just the initial, direct impact. How this feeds through into changes in pension contributions is still very uncertain, and will depend on how both employees and employers response to the change. The 2024 HMRC research doesn't really help here, as most employers asked were not clear on how they would respond. But it is highly likely that some employers and employees will adjust schemes and contributions to offset the higher NI costs.
Although the initial cap is targeted at higher earners, if this change manifests into changes to whole schemes, this would subsequently affect those with contributions currently below the £2,000 threshold as well. And this could also impact on how much additional NI is collected by HMRC, if current salary sacrificed pension contributions are used in different ways across different groups of employees.
Undoubtedly, these Budget measures will give the new Pensions Commission a bigger adequacy gap to fill. Just how much bigger, and for how many people, will take a while longer to establish.
Chris Curry is director of the Pensions Policy Institute
