Chancellor Rachel Reeves's Autumn Budget has introduced a significant change to pension saving rules, sparking criticism from financial experts who label it a 'tax penalty on people trying to do the right thing'.
The reform, announced on November 26, 2025, places a new cap on salary sacrifice arrangements for pensions. From April 2029, only the first £2,000 of employee pension contributions made through salary sacrifice will be exempt from National Insurance Contributions (NICs).
How the New Salary Sacrifice Rules Will Work
Salary sacrifice schemes are a popular and tax-efficient way for employees to boost their pension pots. Workers agree to 'sacrifice' a portion of their pre-tax salary, which their employer then pays directly into their pension fund. This reduces the employee's National Insurance bill, putting more money towards their retirement.
Under the new rules, both employers and employees can still make contributions above the £2,000 threshold. However, both parties will now have to pay National Insurance on any employee contributions that exceed the £2,000 cap. The government states this move makes the system fairer, as the benefits of salary sacrifice relief have disproportionately favoured those on higher incomes.
Employees will not need to contact HMRC directly, as employers will be responsible for implementing the necessary payroll changes.
Industry Backlash and Potential Consequences
The policy has faced immediate backlash from the pensions industry. The Association of British Insurers (ABI) condemned the cap as a 'short-sighted tax grab' that could lower overall pension savings and undermine retirement security for millions.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, provided a tangible example of the impact. 'A worker earning £50,000 who saves 5% of their salary would miss out on savings of £40 per year,' she explained, adding that the restriction could make people feel poorer and reduce pension contributions.
Gary Smith, a senior partner at Evelyn Partners, stated the cap 'throws a spanner into the works' of private sector pensions, reinforcing the sentiment that it penalises responsible savers.
The Wider Context of UK Pension Saving
This change comes at a time when many Britons are already facing a challenging retirement landscape. Despite the success of auto-enrolment, concerns persist that millions are not saving enough to maintain their standard of living after they stop working.
Frozen income tax thresholds and the ongoing cost-of-living squeeze have further strained people's ability to save for the future, shifting more of the retirement burden onto the individual.
In a separate development, the government confirmed the state pension will rise by 4.8% next April due to the triple lock mechanism. This will increase the full new state pension to around £12,548 per year, offering some relief for current pensioners amidst the contentious changes for future retirees.
