Budget 2025 Predictions: Pension Tax-Free Cash Safe for Now, but Salary Sacrifice Faces the Axe
Thankfully it does seem possible, after all the kites that have been flown over the summer and the autumn, that pension tax free cash will escape a big shake up this budget but, who knows what changes the next budget might bring? Any changes here seem to have been postponed pending the Pension Commission’s review of pensions which is to start early 2026. This also seems to be the fate of any changes to the overall taxation system of pension contributions, including the annual allowance- the limit on which pension contributions can be paid tax efficiently in respect of an individual to a HMRC registered pension scheme. This currently stands at £60,000 which is the highest level for 15 years since the tax year 2010 to 2011. There does seem to be a good argument for reducing this without it having an effect on workers, although those with public sector schemes do benefit considerably from such a high level of annual allowance.
Salary sacrifice for pension contributions however does seem to be very much on the chopping board. From an abstract perspective, this seems the right kind of cut for the Chancellor to make. No normal employee understands what salary sacrifice is – it’s obviously a tax wheeze or to be pedantic more of a national insurance wheeze which is even less understood. Not all employers operate salary sacrifice- there is some randomness as to which employers use it and which don’t and this adds to be overall unfairness of salary sacrifice. Generally, it is the larger and more sophisticated employers, with better advisers, that use it for the benefit of themselves and their employees. Bankers are generally always advised to salary sacrifice their bonuses to the maximum extent possible. However some public sector employers and their employees do also use it which abstractly seems somewhat odd from the Government overall perspective.
Salary sacrifice doesn’t work for the low paid- they can’t benefit from it at all if their income is below a certain level. It also gets terribly complicated for people on unpaid maternity or other unpaid types of family leave and often the wrong contributions are paid.
However, it is going to be a universal truth that, while employees who currently have pension contributions sacrificed without their full understanding of what this is, they will all recognise that if salary sacrifice ends for pension contributions or is limited to £2000 then this will impact on their take home pay, which everyone understands.
Really, I wonder why the Chancellor is considering maintaining a £2k cap for pensions contributions that can be salary sacrificed. This just seems to be huge complication that is most likely to lead to payroll making mistakes as to how to apply this limit. Better to be brave and to bring salary sacrifice for pension contributions to an end completely. Payroll already finds pensions hard to administer properly and often payroll is contracted out to third party providers. This change with the proposed limit of £2k on pensions salary sacrifice is most likely just going to increase the cost and complexity of pension contributions without giving much back. Those low paid workers still won’t be able to benefit from it. Those smaller companies, that don’t already have salary sacrifice for pensions, won’t put in place salary sacrifice for pension contributions to gain the benefit from £2k of sacrificed pension contributions for a small number of employees. This proposal seems like a sop that won’t satisfy anyone and doesn’t end any imbalance that it is perhaps attempting to correct. Time for the Chancellor to be bold and call time on salary sacrifice for pension contributions completely and put all employers and employees back on a fair playing field.
