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 will undoubtedly impact upon how people build and pass on wealth.
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 earnings 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 also prompt employers to rethink their reward and remuneration strategies.
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.
Worth noting is that if you are aged 65 or older you will not be subject to the same rules and you will instead retain the full £20,000 cash ISA allowance.
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.
With the 2024 Autumn Budget including the decision to treat unspent pension pots as part of an estate for IHT purposes from April 2027 highlights the need for careful planning when building a larger pension pot – especially given that IHT thresholds will remain frozen until 2031.
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 as a means of passing on wealth
- Any employer schemes or remuneration structures you rely on
If you would like to review your tax position in light of these changes, please contact our friendly team of tax experts.
