Pensions - Articles - Pre-Budget commentary on potential pension tax changes

 Preserving NI savings on pension contributions is crucial as it’s a vital incentive for encouraging participation and controlling payroll costs. A recent survey we conducted with clients indicated that less than 10% of employers would be able to absorb the costs of a reduction in NI savings on pensions contributions. Many employers saying an increase in costs could result in a review of future pay rises, current pensions contribution offerings or future hiring.

 “Employers that don’t use salary sacrifice recently saw NIC rates rise from 13.8% to 15% on a greater proportion of earnings, costing them approximately £1,100 extra per year for an employee earning £50,000 and paying 5% into pensions. As a result some employers introduced salary sacrifice to offset this, saving around £375 annually for the same employee contributing 5% of salary now via salary sacrifice. For employees sacrificing more, the associated employer savings are higher. If the Chancellor made the move to remove these savings, or to count pension contributions as earnings for NI, it would hit both employers and employees hard and risk weakening workplace pensions.

 “Similarly, if the Chancellor was to restrict higher-rate tax relief it would penalise savers who’ve planned responsibly for decades, reduce the incentive for middle and higher earners to save into pensions, and ultimately offer little benefit to overall pension adequacy. This relief acts as a strong motive for individuals to make meaningful contributions towards their retirement. This helps employees ensure they are less reliant on the State Pension and more able to maintain their standard of living in later life. Restricting tax relief to the basic rate for all savers would risk undermining these incentives and could lead to a significant reduction in pension saving among higher earners. This, alongside the flexibility of the tax-free lump sum, encourages meaningful contributions and helps maintain retirement standards.

 “We wouldn’t like to see the Chancellor introduce any levy on pension funds. This would shrink savings and damage trust in the system. People need to believe their pensions are safe, not subject to erosion by policy shifts. Constant tinkering with pension rules is not a strategy; it’s a recipe for disruption. Employers and employees need assurance that today’s framework won’t be dismantled tomorrow, forcing costly system updates and creating unnecessary uncertainty. Short-term fixes, like salary sacrifice caps, are complex to implement and deliver little benefit. Yet, they pave the way for further changes that undermine confidence. The government should prioritise sustainable, predictable reforms that protect savers and support long-term financial wellbeing. Simplifying the pension tax regime, distributing tax relief more effectively, and providing certainty would help individuals plan and maintain trust in the system.”