The Chancellor has announced a restriction to the amount that can be contributed to a private pension under salary sacrifice, in a move that has been lambasted by industry experts.
In her highly-anticipated Autumn Budget on Wednesday, Rachel Reeves said tax-free contributions will be capped at £2,000 from April 2029. At the moment, there is no limit.
The move is set to raise £4.7 billion pounds in 2029/30 and £2.6 billion pounds in 2030/31, according to estimates from the Office for Budget Responsibility.
It was met with widespread criticism from pension experts, who warned that it could deter people from saving more into their pensions.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “Salary sacrifice on pension contributions enables workers to get the full value of every pound through income tax and National Insurance savings. Restricting the amount of someone’s salary that can be sacrificed to £2,000 a year will make people feel that bit poorer and we could see less going into pensions as a result.
“At a time when the Government is looking to improve pension adequacy it seems counterintuitive to do something that could put people off boosting their contributions.”
Jon Greer, head of retirement policy at Quilter, called the policy change a “deeply misguided move.”
“At a time when the Government acknowledges that tomorrow’s pensioners risk being poorer than today’s, policy should be focused on incentivising saving and not dismantling one of the most effective tools we have. Salary sacrifice has long been a cornerstone of workplace pension strategies, helping millions boost contributions and plan with confidence. Restricting it will inevitably lead to cutbacks.”
A survey by Quilter revealed a quarter of people said they would stop using salary sacrifice if tax benefits were reduced or removed, while nearly a fifth (19%) said they would contribute less.
“That is a devastating prospect when we’re already sleepwalking into a retirement crisis. What the smorgasbord approach fails to recognise is that small tweaks can have huge behavioural impacts – and this one could harm millions of future retirements,” Greer added.
The cost to employers could also be substantial at £75 per year for someone earning £50,000 and £450 for someone earning £100,000. As a result, it could lead to employers limiting salary increases or opting against increasing their own contributions beyond auto-enrolment minimums.
Claire Trott, head of advice at St. James’s Place, said: “Pensions cannot deliver long-term security if the rules keep shifting every few years. The changes to salary sacrifice announced in the Budget will add significant complexity.
“The OBR comments that employers will seek to pass on the cost of these limits to employees which will result in reduced contributions as well as reduced pay rises and bonuses. This will reduce the impact of this change, but moreover will mean that many employees will have a long-term impact on their take home pay, increasing the challenges on individuals because of the cost of living.”
Rebecca Williams, divisional lead of financial planning at Rathbones, commented: “Capping salary sacrifice at £2,000 is a blunt instrument that risks doing more harm than good. It would strip away a key incentive for employers to boost pension contributions, undermine efforts to tackle the retirement savings gap and pile extra costs on businesses already under pressure.
“Worse still, it sends the wrong signal at a time when we should be encouraging long-term financial resilience, not making it harder. This isn’t just a technical tweak, it could have real-world consequences for workers’ futures and employers’ ability to offer competitive benefits.”
See also:
Post Budget 2025 Insight – Expert Webinar 10 December 2025
Income tax thresholds frozen until 2031
Dividend tax hike flies in face of encouraging UK investment
Chancellor slashes cash ISA allowance in Budget
Chancellor confirms ‘mansion tax’ on properties over £2 million
Tax relief cut undermines VCTs, says industry
Main image: pushkar-kumar-P2ydUS8Usyo-unsplash
