The headline pensions-related policy from yesterday’s budget is the imposition of employee and employer national insurance contributions (NICs) on salary sacrifice pension arrangements above £2,000 per year, as set out in this short guidance.
Currently, where an employee agrees to give up a portion of their salary in exchange for the same amount being invested in their pension scheme (salary sacrifice), the pension contributions are exempt from both employer and employee NICs. The 2025 budget caps the “NIC free” amount for employee contributions at £2,000. NICs (both employee and employer) will apply at the marginal rate on contributions in excess of that amount.
The income tax saving of salary sacrifice (and on other forms of pension contributions) will continue, as will the NIC savings on employer contributions. The key action for employers will be to ensure their payroll systems are ready for the change when it comes in from 6 April 2029.
Other pension policy announcements were:
- Indexation, capped at 2.5%, will be provided on pre-1997 pensions in the PPF and FAS where the original scheme provided for such increases. This will likely feed through to s179 valuations, and will be relevant to schemes currently going through assessment. The PPF has welcomed the change, noting that it will support the DWP to make the necessary amendments to the Pension Schemes Bill and expects to pay the first increases from January 2027.
- The government will enable DB schemes to pay surplus payments directly to members over normal minimum pension age. This will likely take the form of a new type of authorised lump sum, and will come in from April 2027.
- Slightly more detail has been given on the proposed changes to bring unused pension funds within inheritance tax (IHT) announced in last year’s budget. The Finance Bill 2025-26 will give personal representatives (PRs) a power to direct pension scheme administrators to withhold 50% of taxable benefits for up to 15 months for IHT, and will discharge PRs from liability for payment of IHT on pensions discovered after receiving HMRC clearance.
- Unconnected, multiple employer Collective Money Purchase (also known as CDC) schemes will be able to apply to HMRC to become registered schemes, with HMRC having the power to reject the registration where a scheme is not authorised by TPR.
.jpg)