Briefings hint at salary sacrifice clampdown, but tax-free cash likely safe

A report this week claimed the Treasury has briefed that pension tax-free cash will not be targeted in the Budget after months of speculation about a potential reduction in the maximum amount that can be taken.¹

Meanwhile, other briefings claim that a cap on salary sacrifice is emerging as the most likely way for the Chancellor to raise money from the tax benefits of pensions. This approach could allow the Treasury to raise revenue without provoking backlash from public sector workers or retirees.

While the government have not directly commented on these rumours, it’s worth considering the potential impact should they prove to be true.

Targeting tax-free cash would risk alienating millions of retirees and public sector employees with generous final salary pensions. In contrast, a salary sacrifice clampdown would largely affect private sector workers and may be less likely to cause widespread concern, despite its potentially significant financial impact.

The political benefits would offer little comfort to private sector workers taking advantage of salary sacrifice, as it could lead to a direct impact on their future pension assets.

Salary sacrifice schemes allow employees to exchange part of their salary for pension contributions, reducing their National Insurance (NI) liability. A cap on these contributions would effectively act as a stealth tax on remuneration, potentially reducing pension savings, pay rises and bonus incentives. A salary sacrifice, for pension purposes, also reduces the amount of National Insurance the employer pays, as the taxable earnings will be lower.

Research earlier this year found that around 48% of UK private sector companies offer salary sacrifice pension schemes, rising to 85% among the largest employers.² If a cap is introduced, employees who don’t adjust their contributions could see their take-home pay fall and NI bills rise.

Employers would also face higher NI costs on contributions above the cap, which could lead to reduced pension contributions, smaller bonus pools and more cautious hiring strategies.

Public sector schemes, which typically use what are known as ‘net pay arrangements’ rather than salary sacrifice, would be unaffected. This shields government-backed schemes from the impact of any changes.

Media reports, albeit seemingly well-briefed, suggest the Chancellor has decided not to make changes to tax-free cash. If this speculation does turn out to be true, it will come as a welcome relief for many retirees. However, even when the 25% tax-free lump was reported as being firmly in the Chancellor’s crosshairs, we have consistently warned against taking pre-emptive action. 
 
Unfortunately, many savers and retirees will now have taken their tax-free cash and be unable to reverse that decision. Some will have a clear purpose for it and ideally might have done it as part of an advised retirement plan, but others might now be sitting on a lump sum in the bank and wondering what to do with it.  

Without a clear plan, withdrawing tax-free cash can lead to tax inefficiencies.  

While policy changes remain speculative, clients in salary sacrifice schemes may wish to consider increasing contributions before the end of the 2025/26 tax year to maximise current benefits. Any significant changes are unlikely to take effect before April 2026, however it is important to take professional advice to ensure this strategy is right for you before proceeding

Budget speculation will continue to heat up in the coming weeks. Register for our post-Budget webinar the day after the Chancellor’s announcement, where our expert panel will break down all the changes and how they could impact your financial future.