Budget 2025 – the pensions perspective

A big budget for the pensions industry yesterday, with some interesting measures tucked away in the Red Book as well as the headline changes highlighted by the Chancellor in her speech. The day after the afternoon before we reflect on the key pensions headlines….

Salary sacrifice

No surprises when it came to the changes to salary sacrifice for pension contributions – as has been widely reported in the run up, a new £2,000 cap will be imposed on the amount of pension contribution that is NIC exempt when paid by salary sacrifice.

As a reminder, currently salary sacrifice – where members “give up” a portion of salary in exchange for higher employer pension contributions – is a tax-efficient way of saving for members because employer pension contributions are exempt from NICs. It also benefits employers in the same way – money that would have been paid as salary (and therefore subject to employer NICs) is paid as pension contribution and NIC-exempt. 

Under the Chancellor’s new rules from April 2029 the exemption will only apply for the first £2,000 of salary sacrificed each year – above that normal NICs will apply (currently 15% for employers and 8% for employees on income from £12,584 up to £50,270 (2% on income above that)). 

Comment

After the employer NICs “double whammy” increase in the 2024 Budget many sponsors looked to salary sacrifice for pension contributions as a chance to offset that increased wage bill – that option has now been curtailed with effect from April 2029 and employers will need to look elsewhere for savings. Whilst the Chancellor has pencilled in over £4bn of additional revenue for the Treasury, even the OBR forecast recognises that employers and employees will seek to mitigate the impact of the change through restructuring their reward offerings. With over 3 years to adapt to the change, it is reasonable to ask whether the revenue estimate may prove optimistic…

The new cap will be a particular blow to those individuals who earn between £100,000 and £125,140 and sacrifice salary for pension in order to avoid what is often referred to as the £100k tax trap (where, due to tapering of the personal allowance, individuals can find themselves subject to an effective tax rate of up to 60%). It is also more likely to impact DC savers than DB scheme members – in reality this means the squeeze will be felt much more keenly in the private sector than the public sector (where the majority of schemes remain DB, and where salary sacrifice is much less widely used). 

At a policy level, there appears to be an inconsistency between the efforts of the DWP to address concerns around individuals failing to save enough for retirement, for example through the current Pensions Commission adequacy review, and the Treasury’s approach, which appears to be to reduce tax incentives to save, for example by limiting salary sacrifice and imposing inheritance tax. 

Increases on pre-1997 pension for PPF/FAS

Members of the PPF and FAS will receive increases on compensation referable to pre-1997 accrual. Less generous than it might have sounded when the Chancellor was on her feet in the Commons, the detailed budget paper reveals that this will only apply for those members whose original scheme included indexation for pre-1997 benefits. 

The Red Book indicates that the new increases, CPI-based and capped at 2.5%, will come in from January 2027.

Comment 

Given that there was and is no statutory requirement for increases to be provided on pre-1997 benefits, one imagines there will still be a significant cohort of PPF and FAS members who won’t benefit from this change. There is likely to be a tricky communication exercise for the PPF to explain to members listening to yesterday’s statement in Parliament that this isn’t a blanket entitlement for all members with compensation relating to pre 1997-accrual.

Some not inconsiderable practical challenges spring to mind around identifying which original schemes did include mandatory increases on pre-1997 accrual, given that, in the case of FAS, the scheme may have entered wind up as much as 28 years ago.

Our working assumption is that this will apply to existing members of the PPF and FAS (given FAS is closed it couldn’t be for new members only), but only on a prospective basis – there is no indication in the papers that any uplift will be given to current PPF and FAS pensioners for previous years of retirement, to compensate them for the value that has already been eroded from their pensions. Whilst this announcement is welcome, arguably it could go further, particularly given the size of the PPF’s surplus, a topic we’ve considered before in some depth.

DB surplus payment changes

When we were looking ahead to the Budget earlier this week, we wondered if there might be any room in the Chancellor’s plans for changes to the tax regime that would make it easier to share DB surpluses with members. It wasn’t mentioned in the Chancellor’s speech but tucked away in the detail of the written Budget paper is confirmation that such amendment is to be made. 

The paper says that government is “building on reforms” in the Pension Schemes Bill to “unlock” DB surplus assets “by reducing the tax charge on surplus funds paid directly to members”. This, it says, “will make it easier for members to benefit and for trustees and employers to agree surplus extraction […]”. The paper indicates the change will come into effect to enable payments to be made directly to scheme members who are over normal minimum pension age, where schemes rules and trustees permit, from April 2027”.

Comment 

Clearly lots of detail to come here, and a lack of clarity over what form the new ability to make direct payments to members will take, but the headline is that this looks like a positive step for schemes and members.

Our best guess is that this will come through as a new form of authorised lump sum payment, along the lines we and others suggested in our responses to the “Options for DB schemes” consultation last year. This supposes that the reference to “reducing the tax charge” means the unauthorised payments tax charge that would apply if such a “surplus bonus” payment were made direct to a member now.

The Work & Pensions Committee has just published a letter received from the Pensions Minister dated 17 November, which was a response to their earlier 30 October letter. That letter asked, among other questions, what discussions the Minister had had with HMRC “regarding any changes needed to pension tax legislation needed to make one-off payments to scheme members”. Interestingly the reply does not suggest that an amendment would be announced in short order, suggesting perhaps that significant progress may have been made on this front in the days leading up to the Budget.

With the ability to make the new direct member payments looking like it will be restricted to those who have reached normal minimum pension age, there will be some interesting questions of inter-generational fairness for trustees to consider.

Tax free cash – cap frozen

At one stage rumours were rife that the Budget would impose a change to the amount of tax-free cash members could withdraw from their pensions. In recent weeks this was ruled out by Treasury sources and indeed no changes were announced in yesterday’s budget.

To recap, the lump sum allowance was introduced with effect from April 2024, following the abolition of the lifetime allowance. The cap is set at £268,275 (being 25% of the LTA at the date of abolition).

Comment

Whilst the decision not to reduce the amount of tax free cash members can withdraw is likely to have been a popular one with the electorate, it is worth noting that the allowance has not been increased either. Whilst the allowance might be easy to forget about at this stage (since the number of individuals with savings in excess of the 2023/24 LTA will be small), with no provision in the legislation for this to be uplifted over time, this frozen amount could be considered another form of fiscal creep (similar to the frozen income tax bands that have attracted so much comment following the Budget). 

A brief glance online at the Bank of England Inflation Calculator shows us that, over a working lifetime of 40 years, inflation can have a dramatic impact. As an illustration, £268,275 in 1984 would have been equivalent to nearly £850,000 in 2024. Or put another way, £268,275 in 2024 terms was equivalent to just £85,000 in 1984 money.  

Whilst few people are affected by the lump sum cap now, if there is no action to adjust the cap in future it will continue to be eroded in real terms by the rate of inflation and more and more people will hit the cap over time. This is likely to have a material impact in the public sector, where most schemes remain DB and members are still accruing benefits (so may have pensions worth more than the LTA – indeed the abolition of the LTA was in part driven by concerns over the impact on public sector workers).

Other changes 

There are a number of other pensions changes in the Budget, including:

• Inheritance tax 

The imposition of IHT on unused pension funds and certain death benefits, was announced in last year’s Budget and is due to take effect from April 2027, with the technical details for implementation currently being worked out. We published an update on these measures earlier this week.

There were some further tweaks to proposals for implementation announced in yesterday’s Budget. The Red Book says that “Personal representatives will be able to direct pension scheme administrators to withhold 50% of taxable benefits for up to 15 months and pay Inheritance Tax due in certain circumstances. Personal representatives will be discharged from a liability for payment of Inheritance Tax on pensions discovered after they have received clearance from HMRC. This will be legislated for in Finance Bill 2025-26 and take effect from 6 April 2027.”

We will publish an update to our earlier article with further details on what this means.

• British Coal Staff Superannuation Scheme

In response to increasing political pressure, the Chancellor has confirmed that the assets in the investment reserve fund will be released to members (via the scheme trustees). This is very similar to the commitment that was made for the Mineworkers Pension Scheme last year. 

A press release on the BCSSS website welcomes the announcement and says members will receive a “bonus pension equal to 41% of your guaranteed pension, backdated to 1 November 2024”. The backdating is designed to ensure parity of treatment with members of the Mineworkers Pension Scheme.

• LGPS SDLT relief

The Red Book says that the government will “amend Stamp Duty Land Tax rules, so property transferred within Local Government Pension Schemes are subject to an SDLT relief”. We anticipate that this change is designed to facilitate pooling of real estate assets, further to the reforms being implemented by the Pension Schemes Bill and secondary legislation, whilst removing or reducing liability to SDLT.

There is no confirmation as to when the change will take effect but we are told it will be in the Finance Bill 2026-27.

Next steps

We will publish further updates on the changes announced in the Budget in the coming weeks and months, as and when more details emerge. 

If you have any questions about any of the new measures, please do get in touch with Richard Knight, or your usual contact in the Burges Salmon Pensions & Lifetime Savings team.