Britain's pensions and business organisations have warned Chancellor Rachel Reeves against restricting salary sacrifice schemes or pensions tax relief in next week's Budget. The proposed changes risk damaging public confidence in the retirement system and undermining economic growth, they argue.
Pensions UK and the Federation of Small Businesses have sent a joint letter to the Chancellor ahead of the November 26 Budget. They warn that speculation alone is already eroding saver confidence, triggering increased inquiries from worried savers and creating uncertainty for schemes and employers.
The letter states: «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.»
Impact on lower earners
The organisations highlight how many employers use salary sacrifice to boost pension contributions for lower-earning workers enrolled in defined contribution schemes. In the government-backed Nest scheme, nearly half of large employers contribute above the statutory minimum rate of 3 percent, with over 14 percent covering the full minimum contribution of 8 percent.
The letter warns: «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 exchange a portion of their regular pay for benefits like pension contributions, offering tax advantages for both employees and employers.
Growing uncertainty among savers
Feedback from Pensions UK members in November revealed widespread concern about potential pension tax changes. The organisation received 69 responses, with around a third of schemes reporting increased member contact since speculation started, almost entirely about withdrawing tax-free cash.
Three-quarters of the schemes 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.»
She added: «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.»
Hardest hit: middle-income workers
Jamie Fiveash, chief executive of Smart Pension, warned: «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.»
He identified those most at risk: «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.»
Fiveash explained: «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, this group is already dealing with challenging finances following massive changes to mortgages, rents, energy bills and grocery costs.
Operational burden for businesses
The organisations argue that higher costs and operational disruption would make it harder for employers to offer competitive benefits, invest in growth, or plan effectively. Payroll systems would need adjustment, agreements would have to be revisited, and staff resources diverted.
Fiveash warned: «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.»
She warned of broader consequences: «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.»
She added: «With data from savings and resilience barometer showing that only 43 percent 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, 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.»
She urged the government: «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.»
Note: This article was created with Artificial Intelligence (AI).
