What the 2025 Budget means for pensions

The 2025 Budget included several pensions-related developments. Whilst much of the detail is currently limited (and years away in some cases), it is consider the main headlines and look forward to what 2026 might hold.

Cap on salary sacrifice

Under a pensions salary sacrifice arrangement, an employee agrees to give up (sacrifice) part of their entitlement to salary or bonus in return for an employer contribution to their pension scheme, resulting in a National Insurance saving. This is achieved by varying the individual’s contractual terms and conditions.

From 6 April 2029, the government announced in the Budget that pensions salary sacrifice contributions will be capped at £2,000 a year. Any contributions exceeding that cap will be made subject to employee and employer National Insurance contributions, in the same way as other employee workplace pension contributions. Contributions will remain “exempt from Income Tax (subject to the usual limits),” and presumably any other tax charges if they are within the applicable annual allowance.

The changes are intended to “increase fairness, while protecting ordinary workers” as the “costs of relief through salary sacrifice relate disproportionately to pension contributions from those on higher incomes.” The Government estimates that 74% of basic rate taxpayers using salary sacrifice to make pension contributions will be unaffected by the change.

The changes will be legislated for through primary and secondary legislation which will be introduced in due course. However, initial guidance was published alongside the Budget, and the government intends to publish further guidance before April 2029. Although it is currently unclear exactly how the changes will work in practice, the initial guidance suggests the administrative burden will be placed on employers who will need to report the amounts sacrificed via their existing payroll software. 

It is currently unclear whether the government will also seek to implement measures to prevent employers and employees from renegotiating their contractual terms before the £2,000 cap takes effect. Therefore, it will remain to be seen if these changes will have an impact on levels of pension contributions and individuals’ willingness to save.

Surplus

Under changes being made by the Pension Schemes Bill (PSB), defined benefit (DB) scheme trustees will be given power to amend their scheme rules to pay surplus to sponsoring employers. The government’s original plans for surplus flexibilities also considered the possibility of allowing trustees to pay one-off member lump sums, without baking in long-term liabilities. Such standalone lump sum payments (ie not linked to a pension entitlement) would currently amount to unauthorised payments under the pensions tax rules.

The government has now announced as part of the Budget that, from April 2027, ‘well-funded’ DB schemes will be able to pay surplus funds directly to scheme members who have reached normal minimum pension age (currently age 55 but increasing to age 57 from 6 April 2028 in most cases), where scheme rules and trustees permit it. These changes are to be addressed in the Finance Bill 2026/7 and are due to take effect from 6 April 2027.