UK to Slash Key Pension Tax Perk, Targeting High Earners Under New Budget
Salary-sacrifice pension contributions capped at £2,000 from 2029 in plan expected to raise £4.7 billion
The UK government announced on Wednesday that it will impose a cap on salary-sacrifice pension contributions, a central element of its 2025 budget, effectively clawing back a lucrative tax perk long favoured by high earners.
Beginning in the 2029/30 tax year, only up to £2,000 of pension contributions via salary sacrifice will remain exempt from employer and employee National Insurance Contributions, under legislation confirmed by the Treasury and the independent budget watchdog.
The move is forecast to generate an additional £4.7 billion in revenues by 2029/30, as employers and employees will face National Insurance charges for any contributions above the cap.
For instance, a worker earning £125,000 who sacrifices 25 percent of pay into pensions could impose a £4,387.50 extra levy on the employer annually, and reduce the employee’s tax benefit by around £585.
Average earners on around £40,000 are expected to see no change to take-home pay or pension benefits under typical contribution patterns.
This pension-tax change — among the largest revenue-raising measures in the budget — signals a shift away from tax-favoured pension savings for the wealthy, as the government seeks ways to stabilise public finances without raising standard income tax or value-added tax rates.
The decision follows months of anticipation and speculation over pension-relief reform, which experts had identified as a likely target amid a broader fiscal squeeze.
Supporters argue the reform restores equity in pension taxation and helps close the fiscal gap without unduly burdening average workers.
Critics warn the delayed implementation date could allow employers and high-earners to restructure pay or adopt workarounds, potentially blunting much of the revenue gain.
Some also fear the change may reduce incentives to save into pensions at a time when private retirement saving is under pressure.
While this measure hits higher earners hardest, the government has presented it as part of a broader package aimed at strengthening the public finances and balancing economic needs with fairness.
The coming years will reveal whether the cap reshapes retirement saving strategies, or simply encourages the wealthy to seek alternative tax-efficient vehicles to preserve their pensions.
Beginning in the 2029/30 tax year, only up to £2,000 of pension contributions via salary sacrifice will remain exempt from employer and employee National Insurance Contributions, under legislation confirmed by the Treasury and the independent budget watchdog.
The move is forecast to generate an additional £4.7 billion in revenues by 2029/30, as employers and employees will face National Insurance charges for any contributions above the cap.
For instance, a worker earning £125,000 who sacrifices 25 percent of pay into pensions could impose a £4,387.50 extra levy on the employer annually, and reduce the employee’s tax benefit by around £585.
Average earners on around £40,000 are expected to see no change to take-home pay or pension benefits under typical contribution patterns.
This pension-tax change — among the largest revenue-raising measures in the budget — signals a shift away from tax-favoured pension savings for the wealthy, as the government seeks ways to stabilise public finances without raising standard income tax or value-added tax rates.
The decision follows months of anticipation and speculation over pension-relief reform, which experts had identified as a likely target amid a broader fiscal squeeze.
Supporters argue the reform restores equity in pension taxation and helps close the fiscal gap without unduly burdening average workers.
Critics warn the delayed implementation date could allow employers and high-earners to restructure pay or adopt workarounds, potentially blunting much of the revenue gain.
Some also fear the change may reduce incentives to save into pensions at a time when private retirement saving is under pressure.
While this measure hits higher earners hardest, the government has presented it as part of a broader package aimed at strengthening the public finances and balancing economic needs with fairness.
The coming years will reveal whether the cap reshapes retirement saving strategies, or simply encourages the wealthy to seek alternative tax-efficient vehicles to preserve their pensions.
