Britain’s finance minister Rachel Reeves has moved to scale back a generous pensions tax break used mainly by higher earners, in a measure the government’s fiscal watchdog expects will generate billions in extra revenue. The change, unveiled alongside the 2025 budget on 26 November 2025, targets so-called salary sacrifice arrangements, under which workers agree to give up part of their pay in exchange for higher pension contributions from their employer.
Under the new rules, the amount of salary that can be diverted into a pension before National Insurance contributions (NICs) are charged will be capped at £2,000 a year from 2029, according to the Office for Budget Responsibility (OBR). Above that annual limit, both employers and staff will pay NICs on pension contributions, ending a tax-efficient route that has been particularly attractive for people on six-figure salaries.
The OBR said the reform would raise about £4.7 billion in extra tax revenue in the 2029/30 fiscal year and £2.6 billion in 2030/31, making it one of the strongest revenue-raising measures in Reeves’ budget package. The watchdog published the figures in an early release of its budget documentation, and Reeves later confirmed the cap in her statement to Parliament.
Impact Concentrated On Higher Earners
Salary sacrifice schemes allow employers and employees to reduce the wage on which NICs are due by shifting part of that income into a pension instead. Until now, this has delivered sizeable savings. Employers avoid paying their 15% NICs rate on the sacrificed portion of pay, while workers typically save around 8%.
For staff on very high incomes, the tax advantage can be worth thousands of pounds each year, and the new cap is structured so that most workers making modest pension contributions will be unaffected, while those sacrificing large portions of high salaries will see the perk sharply curtailed. Analysts say the biggest impact will fall on employers of staff earning more than £100,000 a year, such as senior professionals in finance, law and large corporates.
Critics warn that the change may prompt some companies to scale back their pension generosity, as the government will now collect NICs even when contributions are made through salary sacrifice. The OBR has also noted that the lead-in period until 2029 could give firms time to redesign remuneration packages in ways that partly offset the tax hit.
Billions In Extra Revenue For Public Finances
The clampdown on salary sacrifice is part of Reeves’ broader effort to strengthen the public finances while adhering to her pledge to balance day-to-day government spending with tax revenues by 2030. Economic forecasters have estimated that she needs to raise around £30 billion in additional taxes over the coming years to stay within her self-imposed fiscal rules.
Alongside the pension change, the budget includes other measures aimed at higher-income households and wealthier asset owners. These include freezes to income tax thresholds, higher taxes on dividends and savings income, and steps to increase property-related revenues. The OBR estimates that, taken together, the new tax measures will help push the overall tax burden toward a record share of gross domestic product (GDP) later this decade.
Supporters of the reform argue that curbing the salary sacrifice perk will make the tax system fairer by ensuring that well-paid employees and their employers contribute more, while leaving incentives for basic pension saving intact. They also note that NICs help fund the National Health Service and state pensions, giving the government additional resources at a time of continued pressure on public services.
Political And Market Reaction
The decision to focus on salary sacrifice follows earlier reporting that Reeves’ team was examining ways to raise between £3 billion and £4 billion from changes to pensions tax relief, while avoiding headline increases in main tax rates such as income tax or value added tax. In the run-up to the budget, she had repeatedly stressed her commitment to “economic responsibility” and to meeting the government’s fiscal targets without returning to the austerity policies of the previous decade.
Initial market reaction to the broader budget has been relatively calm, with investors looking at the overall balance between tax rises and planned spending increases. Government bond strategists noted that many of the tax measures, including the salary sacrifice cap, are back-loaded toward the end of the forecast period, meaning the heaviest revenue gains arrive closer to 2030.
Pension industry specialists are now assessing how employers and savers might respond. Some expect higher-earning staff to look for alternative ways to structure their remuneration, while others see the change as a signal that future governments could revisit other parts of the pensions tax system as fiscal pressures persist. For now, the OBR’s projections underline that ending the full NICs exemption on salary sacrifice pensions is set to be one of the biggest single contributors to the government’s expected revenue boost in 2029/30.
