The well-trailed cap on pension contributions that reduce national insurance via salary sacrifice is being introduced, but not until 2029. Defined benefit schemes in surplus will be able to reduce the tax charge on surplus funds paid directly to members from 2027. Pensioners in the Pension Protection Fund (PPF) will get indexation on pre-1997 accrual from 2027, but only if the original scheme indexed those benefits.
Salary sacrifice to be capped
The Chancellor announced that, from April 2029, the amount of employee pension contributions that can be sacrificed without paying national insurance contributions (NICs) is to be capped at £2,000. Employee and employer NICs will be charged in the usual way on the amount above £2,000 for what the government describes as “the minority” of those who contribute above this amount.
Based on an analysis of 2023-24 data, the government thinks that 74% of basic rate taxpayers, and their employers, currently using salary sacrifice will be unaffected. However, our initial thinking is that anyone on average earnings (currently around £39,000 per annum) and sacrificing 5% of their salary, is likely to be caught by the cap by 2029.
Salary sacrifice will still allow higher earning employees to manage their taxable pay, particularly around the £60,000 and £100,000 thresholds where the withdrawal of child benefit and tax-free childcare can result in high marginal tax rates. However, the cost will be further payroll complexity for employers.
The deferred implementation date of April 2029 means that employers don’t need to panic, but they will need to plan. Key steps will include understanding the financial impact on their business, evaluating any system updates needed, considering possible changes to pension scheme design, and, importantly, thinking about how they communicate and engage with their employees.
Defined benefit surplus payments to members to be facilitated
From April 2027, the government will enable well-funded defined benefit pension schemes to pay surplus funds directly to scheme members over normal minimum pension age (currently age 55 and rising to age 57 from April 2028), where scheme rules and trustees permit. The government hopes that this will make it easier for members to benefit and for trustees and employers to agree surplus extraction, boosting investment across the economy.
The budget announcements are lacking in any real detail in this area, but the timing is consistent with the expected implementation of surplus release provisions under the current pension schemes bill. Gallagher has been calling for tax changes to allow lump sum payments to members as a way of distributing surplus, so this announcement sounds promising.
Registration of collective defined contribution schemes
Another technical change announced in the budget is to allow only those multi-employer collective defined contribution (CDC) schemes that will be authorised by the Pensions Regulator to also be registered with HMRC. The government will also introduce a regulation-making power to allow HMRC to legislate for CDC schemes more efficiently in the future.
As unconnected multi-employer CDC schemes represent an entirely new form of pension scheme design in the UK, with the relevant legislation and code of practice due to come into effect in June 2026, we can presumably expect further technical amendments in the months to come.
Administration of inheritance tax on unused pension funds
Following on from the headline news in last year’s budget about extending inheritance tax (IHT) to unused pensions and death benefits, the government has now announced that personal representatives will be able to direct trustees to withhold 50% of taxable benefits for up to 15 months and pay IHT due in certain circumstances. Personal representatives will be discharged from a liability for payment of IHT on pensions discovered after they have received clearance from HMRC.
There is again very little detail on this, other than that it will take effect from 6 April 2027, but it appears to pull trustees back into the administration of the IHT changes announced last year. It is to be hoped that the government will be providing further details and guidance on this shortly.
Indexation on pre-1997 pensions in the pension protection fund
From January 2027, the assistance schemes established by the government for members of DB pension schemes, where the sponsoring employer enters insolvency and is unable to pay a minimum level of pension benefits to members, are to be improved.
Both the financial assistance scheme (for members where the sponsor entered insolvency before 6 April 2005) and the pension protection fund (applying to insolvency events after that date) will pay CPI-linked increases, capped at 2.5%, on pensions relating to pre-1997 accrual, but only where the original scheme provided this benefit. This is something that has long been campaigned for by FAS and PPF members.
Tax thresholds frozen until April 2031
The government will maintain personal allowance and higher rate thresholds for income tax (currently at £12,570 and £50,270 respectively) for a further three years until April 2031.
The secondary threshold (the point at which employers start paying NICs) will remain at its current level of £5,000 until April 2031. IHT thresholds will also be frozen for a further year.
State pensions still triple locked
The government has reaffirmed its commitment to the triple lock (where state pensions are increased by the greater of the increases in earnings, price inflation or 2.5%) for the duration of this parliament. In April 2026, the state pension will be uprated by 4.8%, so pensioners will receive up to an additional £575 a year.
Comment from Gallagher
Twelve months on from the employer NICs rises, which increased the attractiveness of salary sacrifice, the government is clamping down on one of its most common uses – for pension contributions. This not entirely unexpected move will not be welcomed by the pensions industry, and it comes as the government’s pensions commission explores how to encourage people to save more for their retirement. While the Chancellor cannot be expected to prioritise the commission’s work, this announcement does seem at odds with any drive to promote pension saving.
Other budget announcements represent business as usual with several current ongoing topics – DB surplus repayments, CDC pension schemes, and IHT on pensions, all covered, with further details expected.
The combination of lower forecast GDP growth, higher than expected inflation, and frozen tax thresholds mean that more individuals will feel day to day financial pressure. Whilst the extreme circumstances of the cost-of-living crisis are now behind us, employees are likely to benefit from access to financial support and education more than ever.
