The government has ignored pleas by the pensions industry and will cap national insurance relief in pensions salary sacrifice at £2,000 from 2029. Members of the Pension Protection Fund and Financial Assistance Scheme will see pre-97 inflation increases, and the British Coal Staff Superannuation Scheme will receive an investment reserve held by the government. 

NICs relief for pension contributions – saving employees 8% for incomes paying basic rate tax and 2% above that – is being capped at £2,000 from 2029, announced before the Pension Commission reporting on adequacy.  

The change, which had been trailed, follows a significant increase in employer NICs at last year’s Budget by reducing the threshold and increasing the headline rate to 15%, which made pensions salary sacrifice more attractive.  

Reeves said the cost to the exchequer of pensions salary sacrifice is expected to reach £8bn in 2030 without change, from £2.8bn in 2017, arguing it benefits mainly the highest paid and claiming bankers put their bonuses into pensions to save tax. 
   

   

Unlike income tax, NICs are currently not payable on pensions either on contributions or when drawn, meaning the government could have also opted to stop the exemption for state pensioner incomes. The Society of Pension Professionals has previously warned that adding NICs on pension contributions hits ‘working people’ - the demographic Labour had pledged to protect from income tax, NICs and VAT increases in its election manifesto.
   

   

The attack on pension saving comes despite pensions industry lobbying. 

Head of policy and external affairs at Independent Governance Group, Lou Davey, said: "By capping salary sacrifice the chancellor has pulled the rug out from under one of the most effective and widely used ways for many savers to boost their pension pot, undermining the Pension Commission's work and the government's own commitment to pension adequacy.” 

  

She added: "The government has a clear desire for the pensions sector to help drive growth, but this move is counterintuitive by limiting the ability of pension funds to invest in UK assets and encouraging savers to make decisions they might regret in retirement.” 

 

The government is also pressing ahead with freezing income tax thresholds until 2030-31, pulling ever more people into higher tax brackets as salaries increase. Davey predicted that with take-home pay effectively reducing, people will be looking to make savings: “The contributions they make to their own pensions are a likely victim of this change." 

 

Mark Futcher, who heads up DC pensions at consultancy Barnett Waddingham, called the cap on salary sacrifice a “lose-lose scenario for employers and employees”. 

 

“With adequacy levels already worryingly low, this change will hit average earners hardest and increase cost pressures for employers at a time when budgets are stretched. It also runs against the aims of the new Pension Commission, which is focused on strengthening long-term saving, not undermining it,” he said.  

The government is also targeting other savings with a 2 point hike, increasing the income tax rate on, property income, savings interest and dividends to 22% for basic rate taxpayers, 42% for higher rate taxpayers and 47% for additional rate payers, while reducing the cash ISA allowance to £12,000 from £20,000. 

 

 

In other developments, the chancellor said members in the PPF and FAS will get inflation uprating on pre-97 benefits. The move comes after the cost of providing retrospective PPF uplifts has come down to £3.9bn from £5.5bn, while the prospective uplifts cost has reduced to £1.2bn from £1.9bn, and with union Unite calling for the change.  

Reeves said the change is made so people who entered these schemes through no fault of their own “no longer lose out” as a result of inflation.

Controversially, the increase will be financed with the PPF reserve accumulated from contributions by schemes whose members are unlikely to receive pre-97 uplifts. 
   

   

Equally controversial is the government’s decision to favour its former supporter base – now flirting with Reform UK – by handing an investment reserve of about £2.3bn to the British Coal Staff Superannuation Scheme, having already given away £1.5bn to the Mineworkers’ Pension Scheme, which the trustees used for pension bonuses.
   

   

   

Reeves has also sought to pre-empt questions on the taxation of state pensioners as the full new state pension is now dangerously close to the frozen income tax threshold, as she confirmed a 4.8% increase to the state pension, saying no tax will be due on small amounts for state pensioners from April 2027. 

Meanwhile, she is abolishing access to class 2 NICs for people living abroad, suggesting there is a loophole to ‘buy’ a way into the UK state pension.