The Autumn Budget confirmed that pensions and tax-efficient saving are entering a period of sustained and important change.
Reforms to salary sacrifice, ISAs and the growing focus on unspent pensions all make it harder to build and pass on wealth tax efficiently.
For savers, business owners and higher earners, the changes that are being introduced over the next few years need to be understood and planned for.
Salary sacrifice under pressure
From April 2029, both employer and employee National Insurance contributions will be charged on pension payments made via salary sacrifice above £2,000 a year.
Contributions up to that level stay as they are, but anything above it will be treated like normal pay for NIC purposes.
Salary sacrifice has long been a mainstay of tax-efficient saving, helping individuals reduce Income Tax and NICs, while boosting pension pots and, in return, allowing employers to cut their own NIC bill.
The new cap will particularly affect higher earners and those in generous salary sacrifice schemes. It may push employers to rethink how they structure their reward strategy.
ISA reform
Although not immediately obvious, the reforms to ISAs are also likely to affect tax-efficient retirement planning.
From April 2027, the annual ISA cash allowance falls to £12,000, although the overall ISA limit of £20,000 remains.
To use the full allowance, up to £8,000 will need to go into stocks and shares ISAs.
This nudges savers towards investment risk and increases the relative importance of pensions as a long-term savings vehicle, especially alongside tighter rules on salary sacrifice.
Unspent pensions and Inheritance Tax
Pensions are increasingly used for intergenerational wealth planning because, in many cases, they sit outside the estate for Inheritance Tax (IHT) purposes.
The freeze on IHT thresholds to 2031 will pull more families into the IHT net.
Whilst pensions were once seen as an effective method of protecting long term wealth, the decision in the 2024 Autumn Budget to include unspent pensions from 2027 means that careful consideration is needed when building up a larger pension pot.
This change, along with this extended IHT band freeze, is likely to bring in many more estates in the years to come.
Planning your next steps
Taken together, these moves reduce reliance on traditional tax shelters and make smart planning more important than ever. Now is a good time to review:
- How much you contribute to pensions
- Your estate planning and use of pensions in succession
- Any employer schemes or remuneration structures you rely on
