Budget 2025 – Pensions and everything else
The government has announced a significant change to National Insurance relief on pension contributions made through salary sacrifice.
What’s Changing?
From 6 April 2029, the full exemption from National Insurance Contributions (NICs) for both employees and employers will be capped at £2,000 per year.
- Any pension contributions made via salary sacrifice above £2,000 annually will attract both employer and employee NICs.
- This reform aims to address the rising cost of the relief, which was projected to increase from £2.8 billion in 2016–17 to £8 billion by 2030–31, and to reduce the disproportionate benefit for higher earners.
What Does This Mean for You?
- Review whether this change will affect your retirement savings strategy and long-term goals.
- Where appropriate, you may wish to maximise pension contributions before April 2029.
- Remember, salary sacrifice often interacts with other benefits such as child benefit and childcare support, so consider the full picture before making changes.
Why Pensions Still Matter
Despite these changes, pensions remain highly tax-efficient, especially for higher and additional rate taxpayers. It’s important not to abandon pension contributions without a full review of the benefits.
Employer Considerations
Employers should assess the financial impact of additional NICs and decide whether to adjust employee benefits accordingly.
Looking Ahead – Other Key Changes from the last budget
Don’t forget the upcoming Inheritance Tax changes from April 2027, which will affect pensions used for wealth transfer.
- Pensions will be subject to inheritance tax on death and, if death occurs after age 75, income tax for beneficiaries.
- This may require revisiting decumulation and estate planning strategies, including lifetime gifting or insurance options.
VCT
While the Chancellor has trumpeted measures to support growth companies, including plans to widen the remit of Venture Capital Trusts and Enterprise Investment Schemes so they can invest greater amounts in companies as they scale up, the sting in the tail is that the tax credits for investing in new shares issued by VCTs are to be reduced from 30% to 20%. This will materially reduce the incentives for investing in what will remain illiquid and higher risk investments. This is likely to deter many investors from backing these VCTs, especially as they can gain greater income tax relief of up to 45% on mainstream, less risky investments in pensions.
Next Steps
We recommend reviewing your financial plan to ensure it reflects these changes and continues to meet your objectives. Our team is here to help you navigate these reforms and optimise your strategy.
Please contact us to arrange a review or discuss your options.