Autumn Budget 2025: what changes are on the horizon for pensions?

The much-anticipated Autumn Budget 2025 was released this week and includes several pensions changes, affecting both schemes and their members.

Some of the key changes are highlighted below.

Salary sacrifice

In an effort to make the “tax system fairer and fit for the 21st century” the government announced that from 6 April 2029, pension salary sacrifice contributions will be capped at £2,000 per year. Only the first £2,000 of salary sacrifice contributions will benefit from NIC tax relief; anything above the £2,000 threshold will incur employer and employee NICs. Of course, this news should come as no shock to the pensions industry based on the extensive rumours circulating prior to the release of the Budget. 

The government claims that current salary sacrifice arrangements disproportionately benefit higher earners, and that 74% of basic rate taxpayers using salary sacrifice will be unaffected by the cap. This change is projected to raise £7.4bn from April 2029 to April 2031, although the Office for Budget Responsibility (OBR) notes this figure is uncertain and will depend on how employers and employees react to the change. 

Guidance on the introduction of the cap was published alongside the Budget but does not provide in-depth detail or clarify how the changes will be implemented in practice. The government has confirmed further guidance will be published prior to April 2029. 

Inheritance Tax treatment of unused pension funds and death benefits

As announced in the Autumn Budget 2024, the government intends to bring most unused pension funds and death benefits into scope of Inheritance Tax (IHT) from 6 April 2027. The Autumn Budget 2025 now reveals that personal representatives (PRs) can direct pension scheme administrators to withhold 50% of taxable benefits for up to 15 months and to pay IHT in certain circumstances. PRs will not have to pay IHT on pensions discovered after they have received clearance from HMRC. The government have confirmed this will be legislated for in the Finance Bill 2025-26 and will take effect from 6 April 2027. 

Surplus payments

In the pursuit to unlock the £160bn of surplus trapped in defined benefit (DB) schemes, the government have said that they are working on reforms to reduce the tax charge on surplus funds paid directly to members. The government intends to enable well-funded DB pension schemes to pay surplus funds directly to scheme members who are over the normal minimum pension age, so long as the scheme rules and trustees permit the payment. 

Alongside the changes proposed in the Pension Schemes Bill earlier this year, which would give DB scheme trustees the power to amend scheme rules to pay surplus to sponsoring employers, this is further evidence the government is committed to releasing surplus in DB schemes back into the economy. 

PPF/FAS Compensation 

Protection has also been introduced for members of the Pension Protection Fund (PPF) and Financial Assistance Scheme (FAS). From January 2027, members of the PPF and FAS will receive CPI-linked increases, capped at 2.5% per year, on pre-1997 pension accruals. The government highlight this measure should protect members from the impact of inflation and help ensure members’ pensions keep pace with the (ever-rising) cost of living. 

The increase will only apply to members whose original schemes had provided this benefit, but it is not yet clear which types of pre-1997 increases will be covered. We anticipate that further details may be made clear through the Pension Schemes Bill. 

In their statement on the Budget, the PPF has confirmed that they welcome the announcement, which could benefit more than a quarter of a million PPF and FAS members. The PPF is now moving forward with preparatory work so that they are able to implement the change as soon as possible. 

State Pension changes 

In April 2026, the basic and new State Pension will be uprated by 4.8%, in line with the annual increase in Average Weekly Earnings for May to July 2025. Alongside the government’s commitment to maintain the State Pension Triple Lock, this is welcome news for pensioners who stand to gain up to £575 each year, depending on their entitlement. The Pension Credit Standard Minimum Guarantee will also be uprated by 4.8% from April 2026.

In addition, for pensioners whose sole income is the basic or new State Pension without any increments, the government intends to reduce the administrative burden so that they do not have to pay income tax via Simple Assessment from 2027-28 if their new or basic State Pension exceeds the Personal Allowance from that point. We can expect further details on this sometime next year. 

Other pension updates 

The government has also confirmed that it will:

• enable unconnected multiple employer collective money purchase schemes (CMP) to apply to HMRC to become registered pension schemes. HMRC will also be allowed to refuse to register or de-register an unauthorised CMP scheme. The government has stated they will introduce a regulation-making power with the intention of allowing HMRC to legislate for CMP schemes more efficiently in future;
• amend Stamp Duty Land Tax rules, so that property transferred within Local Government Pension Schemes are subject to an SDLT relief. This will be covered in the Finance Bill 2026-27.

We eagerly await further details on many of the pension updates in the Budget, and it is clear further guidance is anticipated. Hopefully matters will be clarified through the upcoming Pension Schemes Bill and Finance Bill but if you have any concerns in the meantime, please get in touch with a member of our pensions team.

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