There was a great deal of speculation ahead of the Autumn Budget 2025 and much of that speculation surrounded pensions. Last year there was speculation that the Government was considering reducing the amount of tax-free cash, and making employers pay national insurance on pension contributions. This year saw the same speculation. Whilst the speculation each year is unhelpful, the Government’s decision to keep the tax-free cash unchanged again is welcomed as it provides greater certainty to pension saving.
In 2016, the then Government removed the tax and national insurance (NI) savings from numerous existing salary sacrifice schemes, but crucially and specifically retained those benefits for contributions to employer pension schemes, as they wanted to encourage employers to provide certain benefits to employees.
Unfortunately, changes have been introduced requiring NI to be paid on both employer and employee contributions above £2,000 from April 2029.
There was also speculation that there would be an increase in income tax of 2%, but with a corresponding 2% decrease in NI. This would have had a neutral impact on workers, but would have increased the tax liability of pensioners as they do not currently pay NI on their pension income. Again, leaving this unchanged will be welcomed by pensioners.
Salary sacrifice arrangements
As a reminder, salary sacrifice arrangements enable employees to give up salary in return for benefits-in kind that are often subject to more favourable NI treatment than their salary. One of the most important of these salary sacrifices is pension contributions.
Employees’ pension contributions via salary sacrifice do not count towards salary for NI purposes and therefore employees save on the amount of NI that they pay. The current employee levels are 8% on basic rate earnings, and 2% above higher rate thresholds. The changes will therefore have a greater proportionate impact on basic rate taxpayers. The employer levels of NI are much higher at 15% for earnings above £5,000. The impact on employer costs is therefore going to be significant.
As there are greater NI savings for employers than employees, where employees opt for salary sacrifice, they are often rewarded with greater employer contributions to their pension fund as employers share that saving with employees. Employer pension contributions made outside of salary sacrifice schemes will remain unaffected.
The Office of Budget Responsibility in its November 2025 Economic and fiscal outlook publication has estimated that this will have an additional cost to employers and employees of £4.7bn per year.
State pension increase and personal allowance freeze
The increase in the UK full state pension expected to take it to £12,547 per year from April 2026, is a welcome increase. However, the Government announced that the personal allowance has been frozen at £12,570 until 2031. The result of this is that pensioners in receipt of the full state pension will effectively be paying tax on any pension (excluding the 25% tax free lump sum) that they receive from either their additional private or public sector pension. For basic rate tax payers who receive 20% tax relief on their pension contributions, the knowledge that their pension after receiving a full state pension (and lump sum) will be taxed at a minimum of the same rate will further challenge pension saving, especially in the context of other changes also announced today.
Reduction in cash ISA limit
The reduction in the cash ISA limit from £20,000 to £12,000 may also impact retirement savings for those like the self-employed who do not benefit from an employer contribution and choose to save in ISAs due to the flexibility they offer in terms of withdrawals and income before age 55 (soon to be age 57). Although the ability to invest in stocks and shares ISAs remains, if these were how people to wished to invest, then there would have been no need to limit the cash ISA.
Over 65s will welcome that the Government has not affected the cash ISA limit for them. Often Cash ISAs are the destination for pension lump sums as the interest provides a tax-free and crucially, a guaranteed supplemental income for pensioners. The reduction in the annual amount that can be saved in these accounts would have therefore negatively impacted the retirement income of many pensioners. At retirement, for many pensioners, the security of a regular supplemental income is a priority rather than pure investment growth.
Inadequate pension saving
Just four months ago, on 21 July 2025, the Government announced the launch of a new Pensions Commission. In its press release, the Government stated it was concerned that:
“new analysis shows that there is more to do with the incomes of retirees set to fall over the next few decades if nothing changes:
- Retirees in 2050 are on course for £800 or 8% less private pension income than those retiring today.
- 4-in-10 or nearly 15 million people are under saving for retirement.
This partly reflects too many working age adults (45%) saving nothing at all into a pension, with lower earners, the self-employed and some ethnic minorities particularly at risk.”
Given these stark Government findings that nearly 15 million people are under saving for retirement, it is unfortunate that the Government is now choosing to implement policies in this Budget which are inevitably going to reduce the amount of pension saving and make future retirees poorer.
Impact of Budget changes
The results of this pension change in the Budget are:
- employees of private sector employers facing an increased NI liability are likely to decrease their contributions to their pension fund to mitigate the impact and retain the same take home pay (although increases in contributions possible prior to the change taking effect in April 2029);
- reduced retirement saving and income for current and future pensioners;
- employers could take much stronger action and facing much higher NI contributions could:
- reduce the level of employer pension contributions (if currently paying more than the statutory minimum);
- no longer share any of the NI savings with employees (now capped at the £2,000 contribution);
- provide lower salary increases to offset the cost; and
- reduce headcount due to increased employee costs (as was seen following last year’s increase in employer NI).
All of the above will result in employees saving less for their retirement and exacerbating the already concerning under saving for retirement in the UK.
Conclusion
At a time when employees are facing the strains of the cost of living crisis and struggling to make contributions to their pension fund the combination of the Government’s policies to take away key incentives for pension savings for employees, especially in the private sector who do not benefit from defined benefit pension schemes, and reduce retirement income, are extremely difficult to reconcile.
This is amplified by increasing the pension costs of employers who are doing the right thing in making it more attractive for employees to save and follows on from last year’s Budget where the Government dramatically increased the tax liability on pension savings by making pension funds fall within the inheritance tax regime.
The introduction of the £2,000 cap on NI savings on pension contributions made through salary sacrifice schemes from April 2029 will result in smaller pension pots for future retirees meaning they will have greater reliance on the state in retirement, placing an increased burden on future generations who will need to fund that support. In a struggling economy employers will also seek to reduce their increased pension costs following this change, resulting in reduced pension pots and potential reductions in pay rises and headcount.