Alex Anslow comments on today’s Budget

Alex Anslow, associate director comments: “Rumours always swirl in the build-up to a Budget, but this year’s top contender today came to fruition. From 6 April 2029, pensions salary sacrifice contributions will be capped at £2,000.”

“Achieved by varying contract terms and conditions, under a pensions salary sacrifice arrangement an employee agrees to give up (sacrifice) part of their entitlement to salary or bonus in return for an employer contribution to their pension scheme, resulting in a national insurance contribution (NIC) saving. Today’s move is expected to generate an additional £4.8bn for the Treasury in its first year, as it will significantly broaden the scope of workers’ income which will be subject to NICs. But how the £2,000 cap will work in practice is currently unclear. If it is overly complicated then it might be difficult to fully realise the revenue expected by the Treasury.”

“While today’s announcement may come as unwelcome news for employers (and their employees) operating pensions salary sacrifice arrangements, the fact that the changes will not take effect until 2029 should help soften the blow and give time for employers to fully assess the impact of the change. There is also a risk of creating a negative impact on pension saving just as the government revives its Pensions Commission review on adequacy. But, against the backdrop of numerous other pensions developments slated to come into force between now and 2029, at least the period of grace should help provide breathing space for all concerned and give time to prepare.”

“Perhaps today’s biggest surprise pensions package is that, from January 2027, pre-1997 pensions in the PPF and FAS will benefit from CPI-linked increases, capped at 2.5% a year. Designed to help benefits keep pace with inflation, the catch here is that the individual’s original scheme must have provided inflationary increases on benefits built up before 1997. This raises the question about whether historical records will be in place to allow this to happen in all relevant cases.”

“Finally, under changes being made by the Pension Schemes Bill, trustees of defined benefit schemes will be given power to amend their scheme rules to pay surplus to sponsoring employers. The Government’s original plans for introducing surplus flexibilities also floated the possibility of allowing trustees to pay one-off member lump sums without baking in long-term liabilities. Such payments would currently amount to unauthorised payments under the pensions tax rules. Whilst today’s Budget papers suggest this change will now be given the green light from April 2027, where scheme rules permit and provided the members in question are over normal minimum pension age, it will be important to see exactly how these new measures are framed.”