UK Budget 2025: what does it mean for pensions?

The chancellor delivered her Autumn Budget on 26 November. What are the key take-aways for UK pensions?

Salary sacrifice

From April 2029, salary sacrifice for pension contributions will be restricted. The national insurance contribution (NI) exemption will only apply to the first £2,000 of salary sacrificed each tax year.

Salary sacrifice allows employees to give up part of their salary in return for a larger employer pension contribution. For example, if an employer contributes 3% of salary and an employee gives up 5% of their salary, then the total employer contribution is 8%.

Under current rules, the employee pays no income tax or NI on the 5% of salary they have given up and the employer pays no employer NI on the 8%.

From 6 April 2029, employees will still (subject to the usual limits) pay no income tax on sacrificed salary, but the NI exemption will only apply to the first £2,000 of salary given up. Beyond this threshold, salary sacrifice can still be used but employee and employer NI will apply. (Employers will still pay no NI on their standard contribution, 3% in the example above.)

The related guidance paper says that "[e]mployees who choose to sacrifice salary to receive Tax Free Childcare or Child Benefit can keep doing so. However, any pension contributions above £2,000 will be subject to employer and employee NICs."

The Office for Budget Responsibility suggests that employers "could look to replicate the tax benefits of salary-sacrifice by reducing future wage growth and instead providing employees with higher employer pension contributions [which remain free of NI]. It would also be possible to formally replicate salary-sacrifice through an agreement to reduce wages and increase employer pensions contributions. However, this behaviour would be constrained by interactions with Operational Remuneration Agreement (OpRA) rules and employment law meaning that such reductions would need to be agreed with the entire workforce".

This change is expected to raise £4.7 billion in 2029-30 and £2.6 billion in 2030-31.

Personal tax thresholds

The income tax personal allowance, the higher-rate threshold and additional-rate threshold are frozen for a further three years until April 2031. The NI secondary threshold (the per employee threshold at which employers start to pay NI) is also frozen for a further three years until April 2031.

Tax-free lump sums

There is no change to the rules relating to tax free lump sums. The standard individual lump sum allowance will remain at £268,275.

DB surplus payments

The Budget document suggests that the government may intend to change the law to allow one-off payments out of surplus to the members of defined benefit (DB) schemes. It refers to " reducing the tax charge on surplus funds paid directly to members" (at the moment a one-off payment would be unauthorised and trigger tax charges), introducing "flexibilities for employers and direct payments to members from April 2027" and enabling "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". 

PPF and FAS - pre-1997 pension 

To help to protect members of the Pension Protection Fund (PPF) and Financial Assistance Scheme (FAS) from the impact of inflation the government will, from 1 January 2027, introduce CPI-linked increases (capped at 2.5% a year) on pre-1997 pension where the original scheme provided that benefit.

The PPF has published this statement. It looks as though this change will be achieved by amendment of the Pension Schemes Bill.

Boosting investment in the UK

The ISA allowance will remain at £20,000 but, to support investment, most people will only be able put up to £12,000 into a cash ISA from April 2027. Financial services firms will also "be providing new, easily navigable ways for people to find the right UK investment for them". This change will not affect people over the age of 65 who will still be able to save up to £20,000 in a cash ISA.

The British Business Bank  "has announced it intends to launch a VentureLink initiative for pension funds. This will see the BBB publish enhanced information on its commitments to venture funds, as part of a package of measures to help pension funds boost their investment capability, reduce barriers to investment and unlock billions more in long-term investment for UK science, technology and innovation".

Inheritance tax and pensions

As announced at Budget 2024, unused DC pension funds and some lump sum death benefits will be included in estates for inheritance tax purposes from April 2027. 

The 2025 document contains a statement that "Personal representatives will be able to direct pension scheme administrators to withhold 50% of taxable benefits for up to 15 months and pay Inheritance Tax due in certain circumstances. Personal representatives will be discharged from a liability for payment of Inheritance Tax on pensions discovered after they have received clearance from HMRC". More information is provided in a separate policy paper. 

These provisions are due to be included in the Finance Bill 2025-26 and to take effect from 6 April 2027. The draft Finance Bill – expected within the next week or so – should also help to confirm which benefits are caught by this change.

In terms of inheritance tax thresholds, the inheritance tax nil-rate bands will stay fixed at their current levels for a further year to April 2031.

Collective money purchase schemes

To support reforms already in progress, the upcoming Finance Bill will also allow unconnected, multiple employer CMP schemes (for example, a new CMP section in an existing defined contribution (DC) master trust) to apply to HMRC to become a registered pension scheme. 

It will also allow HMRC to refuse to register or to de-register an unauthorised CMP scheme and take a regulation-making power to allow HMRC to legislate for CMP schemes more efficiently in the future. 

Local Government Pension Scheme

Finance Bill 2026-27 will amend stamp duty land tax rules so that "property transferred within Local Government Pension Schemes are subject to an SDLT relief". 

State pension

The government commits to the triple lock for this parliament, and confirms the state pension will rise by 4.8% in April 2026.

British Coal scheme

The investment reserve fund in the British Coal Staff Superannuation Scheme will be transferred to the scheme’s trustees and paid out as an additional pension to members.

Actions for trustees and employers

Trustees and employers should look out for further details on the changes listed above.

Employers who offer salary sacrifice to their workforce might like to take advice. Considerations might include:

• Salary sacrifice. Will salary sacrifice for pension contributions be offered to the workforce in the same way as at the moment? Will changes be needed to salary sacrifice agreements or contracts of employment to take account of the £2,000 threshold? Would it be helpful to send an initial update to staff, who might have questions following the Budget announcement?
• Reward packages. Are there any realistic options to restructure reward packages for higher earners (in particular the split between pay and employer contributions)?
• Employer pension contributions. If it is necessary to consider reducing these, are there any contractual or other restrictions and is there a requirement to consult?
• Communication. What information will pension scheme trustees or providers need and when? What information will staff need and when?
• Payroll. HMRC will publish further guidance on payroll reporting in due course, but systems and payslip changes are likely to be needed.
• Documentation. What literature, websites and other self-service portals and documents will need to be updated and when would it be best to do this? 

Osborne Clarke comment

Not all employers offer salary sacrifice for pensions contributions. However, for those that do it helps to reduce their NI costs. The £2,000 threshold will help to protect some employers and their employees from the impact of the 2029 change. However, others will face increased NI costs. This could force some difficult choices around employer pension contributions, benefits, pay and recruitment.

There is also a risk that some savers will see the change as a disincentive to pension saving. Combined with the pensions and inheritance tax reforms it could create a double impact which discourages saving – in particular into defined contribution schemes – at the very time the government has tasked a pensions commission to consider the question of retirement adequacy.

We welcome the announcements made in relation to DB surplus payments and PPF and FAS pre-1997 pension. The decision to award increases to pre-6 April 1997 pensions for members covered by the FAS and the PPF is clearly good news for FAS and PPF members. However, as always, it will be important to understand the detail of the underlying legislation. It appears that increases will only be awarded where the admissible rules of the scheme in question required mandatory indexation for pre-6 April 1997 benefits rather than where there was a discretionary benefit only. Furthermore, the effect of this change on so-called PPF + cases where trustees can secure benefits in excess of PPF compensation levels but less than full scheme benefits with an insurer needs very careful consideration and could affect the outcome for many cases.