Budget 2025: pension salary sacrifice capped at £2k

Sara White, Editor, Business & Accountancy Daily. Croner-i

A £4.7bn tax swoop on pension savers is due to come into force when tough new rules on the use of salary sacrifice for pension contributions start.

But the chancellor will not introduce the measure immediately, leaving pension savers and employers to contemplate possible alternative approaches for a few years.

The plan will see the capping of national insurance contribution (NICs) relief on salary sacrifice into pension schemes to the first £2,000 of pension contributions per person from 2029.

The chancellor said the high cost of pension tax reliefs meant it was essential to reform the current system.

During her one-hour plus Budget speech, Reeves told MPs: ‘That is not sustainable for our public finances, I am introducing a £2,000 cap for contributions above that taxed in same way as other pension contributions.

‘To give individuals time to adjust, the changes will come into effect in 2029.’

The costs of this relief were set to increase from £2.8bn in 2016-17 to £8bn by 2030-31 without reform, and use of these arrangements has disproportionately benefitted higher earners.

This will drag in plenty of tax for the Treasury with year one estimated revenue of £4.7bn in 2029-30, although this falls to £2.5bn in year two of operations, presumably due to changes in behaviour. 

The cap shields 74% of basic rate taxpayers using salary sacrifice, and the government said it will ‘continue to support pension saving through auto-enrolment and tax relief, worth over £70bn per year’.