Chancellor, Rachel Reeves, has delivered her 2025 Budget, confirming several pension changes, including a cap on salary sacrifice, plans to index for inflation on pre-1997 Pension Protection Fund (PPF) benefits, and changes to the tax charged on defined benefit (DB) pension surplus funds paid directly to members.

Some of the announcements from Reeves' Budget were revealed earlier than expected, after the Office for Budget Responsibility shared its forecasting on the Budget in error.

This included plans to charge National Insurance on salary sacrifice pensions above £2,000, and to extend the freeze on income tax thresholds.

Reeves' full Budget speech and supporting documents provided further information on these changes, revealing that the costs of salary sacrifice tax relief were set to increase from £2.8bn in 2016-17 to £8bn by 2030-31 without reform, and suggesting that the use of these arrangements has disproportionately benefitted higher earners.

The Budget papers suggested that the cap would "shield" 74 per cent of basic rate taxpayers using salary sacrifice, and stressed that the government continues to support pension saving through auto-enrolment and tax relief, worth over £70bn per year.

Given this, the government described the changes as a "pragmatic approach", which protects lower earners, while retaining generous tax relief on pension contributions in full.

However, the pensions industry has hit back at the changes to salary sacrifice, warning that this is the wrong decision at exactly the wrong time, flying in the face of the work of the Pensions Commission and the growing focus on pensions adequacy.

The Budget papers also revealed broader pension changes, confirming that the government will enable well-funded defined benefit (DB) pension schemes to pay surplus funds directly to scheme members over the normal minimum pension age, where scheme rules and trustees permit it, from April 2027.

It stated: "At the Budget, the government is building on reforms to unlock some of the £160bn of DB pension scheme surplus by reducing the tax charge on surplus funds paid directly to members. This will make it easier for members to benefit and for trustees and employers to agree surplus extraction, boosting investment across the economy."

LCP partner, Steve Hodder, said this "looks like great news, and removes another hindrance to some well-funded schemes agreeing to share surplus with members".

"This announcement paves the way for a "Christmas surplus bonus" approach that is easier for companies to swallow and probably more highly-valued by members," he stated. "It also, likely, brings forward tax revenues for HM Treausry."

Aon partner and head of UK retirement policy, Matthew Arends, agreed, suggesting that this seems to indicate the government will implement the widespread desire from the pensions industry to allow surplus release to members via lump sums in a tax-efficient way.

“However, it is unclear why the announced measures are ring-fenced to older members," he added.

"There is the danger that the unintended consequence will actually be to unnecessarily restrict surplus payments to members if trustees want to treat all scheme members equally regardless of age.”

In addition to this, Reeves confirmed plans to index for inflation on pensions accrued before 1997 in the PPF and the Financial Assistance Scheme (FAS), as well as plans to transfer the investment reserve fund of the British Coal Staff Superannuation Scheme to scheme members.

Reeves also stated again that the government would be standing by its triple lock commitment, with pensioners set to receive an above-inflation increase as a result.

To support this, the government confirmed that it will ease the administrative burden for pensioners whose sole income is the basic or new state pension without any increments, so that they do not have to pay small amounts of tax via simple assessment from 2027-28 if the new or basic state pension exceeds the personal allowance from that point.

The government said it is exploring the best way to achieve this and will set out more detail next year.

However, LCP partner, Steve Webb, pointed out that there’s no detail, and "it’s actually very hard to see how that could be done without creating new cliff edges".

"What about people on the old state pension whose total state pension is just a whisker above the new state pension rate – do they get chased?" he queried, arguing that while the intent is understandable, "in practice it will be horribly complex".

Aegon pensions director, Steven Cameron, also emphasised that "importantly, this is not the same as waiving the tax".

“While state pensioners may not face tax bills through the letterbox, many of those solely reliant on the state pension will in future pay tax on some of this – a case of the government giving with one hand and taking with the other," he stated.

Pensions has also been caught by broader reform, as the government is also looking to amend Stamp Duty Land Tax rules, so property transferred within Local Government Pension Schemes are subject to an SDLT relief.

This will be legislated in Finance Bill 2026-27.

In addition to this, the government will enable unconnected, multiple-employer collective money purchase (CMP) schemes to apply to HMRC to become a registered pension scheme and allow HMRC to refuse to register or to de-register an unauthorised CMP scheme.

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