Any salary sacrifice clampdown ‘would hit pension savers, firms and economy’

Any potential clampdown on salary sacrifice or pensions tax relief in next week’s Budget would risk damaging public confidence in the pensions system and undermining economic growth, organisations representing the pensions industry and businesses are warning.

Pensions UK and the Federation of Small Businesses (FSB) have sent a joint letter to Chancellor Rachel Reeves, urging her not to curb salary sacrifice schemes or wider pensions tax relief.

Ahead of the November 26 Budget, the organisations warned speculation alone over potential changes is already eroding saver confidence, with increases in inquiries from savers and the potential for people making unnecessary early pension withdrawals.

It is also causing uncertainty for schemes and employers, they argued.

The letter to the Chancellor says: “Limiting salary sacrifice will hit working people trying to save for a better pension in retirement – including those on lower-than-average earnings for whom every penny counts both in working life and at retirement.”

It adds: “In the context of auto-enrolment, many employers use salary sacrifice to boost the contributions of those lower-earning workers that they enrol into defined contribution schemes.

“For instance, in the Government-backed Nest scheme, nearly half of large employers contribute above the statutory minimum rate of 3%, with over 14% covering the full minimum contribution of 8%.

“If salary sacrifice was removed, it’s inevitable that lower-earning workers currently benefiting from these arrangements would experience less employer generosity and higher deductions from their pay.”

Salary sacrifice schemes allow workers to give up a portion of their regular pay in return for a different benefit, such as pension contributions. The schemes have tax advantages for employees and for employers.

Pensions UK and the FSB said many employers rely on salary sacrifice schemes to support staff retention and reward – and higher costs and operational disruption would make it harder to offer competitive benefits, invest in growth, or plan effectively.

Payroll systems would also need adjustment, agreements would have to be revisited, and staff resources diverted, they argued.

Pensions UK said feedback from members in November found the vast majority are concerned about potential pension tax changes, agreeing that rumours are damaging confidence in pension saving.

The organisation, collected received 69 responses, said around a third of schemes had already seen increased member contact since speculation started, almost entirely about withdrawing tax-free cash.

Three-quarters of the schemes it was in contact with believe savers are likely or very likely to alter retirement contributions or decisions if rumoured reforms go ahead.

Zoe Alexander, director of policy at Pensions UK, said: “The pension system relies on stability and predictability. Savers and employers can only plan with confidence when the rules are clear and consistent.

“Any change to salary sacrifice would inject uncertainty into a system that needs long-term trust, not sudden shocks. It would add operational pressure for employers and risk undermining the retirement prospects of working people across the country.”

Jamie Fiveash, chief executive of Smart Pension, said: “Salary sacrifice has helped millions save more during a period of real uncertainty. Any changes must be made with care or they will create long-term financial consequences.

“Looking at our savers, we know that those hardest hit by any salary sacrifice caps will be in the 35-44 age bracket, with a higher-than-average, but not a high, salary.

“These are the savers who should be maximising their retirement savings while they’ve still got time to benefit from the compounding of pension pot growth.

“Instead, it is a group of people who are already dealing with a challenging financial situation, following massive changes to their mortgages and rents, energy bills and grocery costs in recent years. It’s unfair that their retirement savings could also be squeezed.

“Most of these savers would not have benefited from auto-enrolment from the start of their working lives.”

Speaking about the potential impact for employers, he added: “A cap would add cost and operational pressure at a time when many businesses already feel stretched. Changes to payroll systems or staff consultations are lengthy processes that are unlikely to be completed by April 2026.”

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “Restricting salary sacrifice on pension contributions could cause long-term damage to people’s retirement prospects.

“We could see employees becoming less likely to increase pension contributions beyond auto-enrolment minimums.

“In addition, the extra burden on employers means they will not only be less likely to increase their own contributions, but they may also restrict future salary increases.

“With data from (Hargreaves Lansdown’s) savings and resilience barometer showing that only 43% of households are on track to achieve an adequate retirement income, we need to make sure that the right incentives are in place to help people save for the long term.”

Hannah Gurga, director general of the Association of British Insurers (ABI), said: “Too many people are nearing retirement without adequate savings. We should be encouraging saving, but capping salary sacrifice risks having the opposite effect. It also piles further pressure on to businesses and payroll systems.

“Savers and the pensions system need stability and predictability. Speculation and tinkering with pension policy risks inflicting lasting damage on people’s confidence in the system. Government must resist short-term fixes that undermine long-term security. Britain cannot afford to swap pension stability for short-term revenue raisers.”

Charlene Young, senior pensions and savings expert at AJ Bell, said: “Thousands of employers currently use pensions salary sacrifice as a way of efficiently paying pension contributions while cutting national insurance costs for them and their employees.”

Mike Ambery, retirement savings director at Standard Life, part of Phoenix Group, said: “Pension saving depends on stability and trust. Frequent policy changes make people question whether the system works for them, and this could hinder efforts to close the UK’s retirement savings gap.”