Reports and Briefing Notes

PPI Digest: Autumn Budget 2025

PPI Director Initial Response

Clearly, very difficult choices have had to be made in the Budget today. It was always unlikely that pensions would escape completely from this, even though both the Pensions Schemes Bill and the new Pensions Commission are seeking ways to increase the amount of money that future generations will have to support themselves in retirement.

The introduction of a contributions cap of £2,000 on salary sacrificed pension contributions from 2029 will not affect many of those who currently benefit from these arrangements, but will still mean a significant increase in NI contributions for employers and employees.

An employee with median gross annual earnings of £39,039 and sacrificing 5% of their salary in lieu of pension contributions paid by their employer will see no impact to their take home pay. However, given the delay in introducing the change, by 2029 a median earner may well start to see an increase in their NI contributions.

When the policy is implemented in 2029 and if the current median earnings level were to grow in line with the determinants used by the OBR in its forecasting, the projected median salary of close to £43,000 will be impacted by the policy when making a 5% salary sacrifice.

It will reduce their potential take home pay by £12 a year, and increase the cost of employment to the employer by £22 a year.

If they were to make a 10% sacrifice to support higher pension savings then the policy would cost the individual £184 a year, and the employer £344 year.

The largest impact the measure will have upon employees is for those earning at the Upper Earnings Limit, £50,270 a year. An employee earning £50,270 sacrificing 5% of salary will be £41 a year worse off a year (and the employer pays an additional £77 NI a year) and when sacrificing 10% of salary a year will be £242 a year worse off (with the employer paying an additional £454 NI a year).

How this feeds through into changes in pension contributions is still very uncertain, but some employers and employees will adjust schemes and contributions to offset these higher costs.

Despite the initial cap being targeted at higher earners, where employers adjust schemes for all of their workers to offset the higher NI costs, this could subsequently affect those with contributions currently below the £2,000 threshold as well. 

The continued freezing of personal income tax thresholds and the increase in the tax rates on income from savings will at least be partially offset for many pensioners through the continuation of the triple lock for state pensions.

Undoubtedly, these Budget measures will give the new Pensions Commission a bigger adequacy gap to fill.

Chris Curry, PPI Director