Budget 2025: Pensions changes

Here is our round up of the key pensions changes announced in the Budget.

Changes to salary sacrifice from April 2029

From April 2029, only the first £2000 of pension contributions that an employee makes via salary sacrifice each year will be exempt from National Insurance contributions (NICs). It will still be possible to make contributions above £2000 via a salary sacrifice arrangement, but the excess will be subject to employer and employee NICs in the same way as other employee pension contributions. Employers will need to report the amounts sacrificed via their existing payroll software. HMRC will publish further guidance on this. 

Employer pension contributions that are not made under a salary sacrifice arrangement will continue to be free of NICs.

Surplus payments direct to members

From April 2027 defined benefit schemes will be permitted to pay surplus funds directly to members over “normal minimum pension age” (currently 55, rising to 57 in April 2028) if scheme rules permit and the trustees agree.  The Budget document does not go into detail, but we assume the Government is planning to allow standalone lump sums to be paid from surplus without requiring the lump sum to be connected to a pension entitlement. This may make it easier for trustees and employers to reach a deal that allows for a scheme surplus to be shared between the employer and scheme members. 

Further developments re IHT on death benefits

The Government has announced further changes regarding how the inheritance tax (IHT) regime will operate once pension scheme death benefits become subject to IHT in April 2027. Personal representatives will be able to direct pension scheme administrators to withhold 50% of taxable benefits for up to 15 months and pay IHT 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. 

The measures announced in the Budget go some way towards addressing the issue of personal representatives having an IHT liability in respect of funds that are not under their control.  However, they do not address other issues with the draft legislation (eg a potential mismatch between the wording and the policy intent regarding the exemption for lump sum death-in-service benefits).  It may be that publication of the Finance Bill, which normally happens shortly after the Budget, will bring further clarity. 

Pension Protection Fund: indexation on some pre-97 benefits

From January 2027 the Government will introduce CPI-linked increases, capped at 2.5% a year, on Pension Protection Fund and Financial Assistance Scheme compensation in respect of pre-1997 pension accruals where the original scheme provided indexation on such benefits.