Rumors regarding potential changes to pensions in the upcoming budget have emerged, particularly concerning tax benefits associated with salary sacrifice pension schemes. Some reports suggest that a reduction in the tax-free cash that individuals can access from their pensions is unlikely; however, the Chancellor is reportedly considering adjustments to salary sacrifice options.
Salary sacrifice programs allow employees to forgo a portion of their salary in exchange for non-cash benefits, such as increased employer contributions to their pension. This arrangement can be tax-efficient since it reduces the employee’s gross pay, leading to lower National Insurance contributions. Such schemes may also enable parents earning above £60,000 to retain more child benefit by reducing taxable income.
The government may propose limiting the tax advantages of salary sacrifice schemes, with discussions indicating a potential cap of £2,000 on the earnings exchangeable for pension contributions benefiting from National Insurance exemptions. This change could raise substantial revenue but may also result in reduced take-home pay for employees and increased costs for employers.
Currently, individuals aged 55 or older (rising to 57 in April 2028) can withdraw up to 25% of their pension as a tax-free lump sum, within certain limits. Recent reports suggest that the Treasury has ruled out any imminent changes to this aspect of pension withdrawals.
Pension tax relief, which allows the government to add a top-up to individuals’ pension contributions, is also under scrutiny. This relief can significantly enhance savings and is a key reason many choose to invest in pensions. Although there are ongoing discussions about reevaluating these tax benefits, current indications suggest that alterations to tax relief are not on the immediate agenda for the budget.
Source: https://www.theguardian.com/uk-news/2025/nov/15/what-pension-changes-rachel-reeves-considering-budget