Date posted: 30th Jul 2025
With Chancellor Rachel Reeves facing a £20 bn–£30 bn fiscal gap, all eyes are on the Autumn 2025 Budget.
While Labour pledged not to hike income tax, VAT, or employee National Insurance for working people, several pension‑related adjustments are being considered behind the scenes.
Flat‑Rate Tax Relief on Personal Pension Contributions
There’s growing speculation that the Chancellor might introduce a flat 30% tax relief rate on personal pension contributions across all earners.
Under the current system, basic-rate taxpayers receive 20% tax relief, higher-rate 40%, and additional-rate 45%. A flat 30% model would benefit some lower earners but significantly reduce relief for higher earners, cutting relief by £6k to £9k on a £60k contribution and possibly even higher for those that use pension contributions to save their personal allowances.
However, analysts warn this approach could backfire:
- It would be complex to implement, requiring tax charges on pension schemes for public-sector workers.
- It risks breaching Labour’s tax pledge and alienating public-sector employees.
Curtailing or Capping the Tax-Free Lump Sum
Another viable route is to reduce the tax‑free lump sum, currently capped at £268,275. Reports suggest a cap could be lowered to around £100,000. While logistically simpler than restructuring relief, this change would upset high savers and requires careful handling to avoid political fallout.
Imposing National Insurance on Employer Pension Contributions
Allowing employer contributions to attract National Insurance is a clearer cash-raiser.
At present, these contributions enjoy a full NI exemption, so there are significant amounts to be raised by doing this.
Broader Pension Tax Overhauls on the Table
Options under consideration include:
- Introducing a reduced NI rate
- Repealing salary‑sacrifice NI exemptions
- Reducing annual allowances
We will keep you updated with any planned changes but if you are considering making pension contributions, it may be a good time to speak to your financial adviser about the options available.
As ever, if you have any queries, please get in touch.
