There’s been ongoing speculation about possible changes to pension tax rules in the upcoming Autumn Budget. The Treasury has reportedly confirmed it’ll not cut the 25% tax-free pension lump sum.
Maike Currie, VP Personal Finance at PensionBee, says:: “Salary sacrifice is one of the most straightforward and efficient ways for employees to boost pension contributions. Rumours that the government might change the rules would be an unpopular move, disincentivising companies who provide workplace pensions and sending the wrong message to millions of basic rate taxpayers trying to save more for their future.”
That’s welcome news for many savers, particularly those nearing retirement. For lots of people, this allowance is a key part of their long-term financial plans - helping to pay off a mortgage, enjoy a holiday, or support family.
That’s the good news. But at least five other pension-related tax measures are still being discussed ahead of Chancellor Rachel Reeves’ announcement on 26 November.
The government is said to be looking for up to £30 billion in additional revenue, and pensions may be among the areas under review.
Salary sacrifice cap
One of the most likely measures is allegedly a new £2,000 a year cap on salary sacrifice pension contributions that avoid employer National Insurance (NI).
Here’s how salary sacrifice works:
you agree to give up part of your salary in exchange for pension contributions;
your employer pays that amount directly into your pension;
you pay less Income Tax and NI on the reduced salary;
your employer saves on NI contributions (currently 15% on the sacrificed amount); and
there’s currently no limit on how much salary can be sacrificed.
Here’s what could change:
contributions above £2,000 per year may no longer avoid NI;
those earning under £50,270 would pay a rate of 8%; and
those earning £50,270 and over would pay a rate of 2%.
The move could reportedly raise around £2 billion a year.
Income Tax rise that may affect pensioners
There’s also speculation about a rise in the basic rate of Income Tax. Some reports suggest it could increase from 20% to 22%. The proposal would pair this Income Tax rise with a matching 2p cut to NI for working people.
Here’s how it currently works:
workers pay both Income Tax and NI on their earnings; and
pensioners pay Income Tax but not NI.
Here’s what could change:
workers would pay 2% more in Income Tax, but save 2% on NI; and
pensioners would pay 2% more in Income Tax with no NI saving to offset it.
This means nearly nine million pensioners could see their tax bills rise. The Personal Allowance has been frozen at £12,570 since 2021, while the full new State Pension has risen to £11,973 per year (2025/26). Future State Pension increases could push more pensioners over the tax threshold, meaning they’ll pay Income Tax on their retirement income.
National Insurance on rental income
Another measure reportedly under review would bring landlords into the NI system for the first time.
Here’s how it could work:
a 20% NI rate on rental profits up to £50,270; and
an 8% NI rate on profits £50,270 and above.
Rental income is currently exempt from NI. The change could reportedly raise around £3 billion a year, but it’d directly affect retired landlords who rely on rental income to supplement their pension income.
Watch the video below to see what other property-related changes the Chancellor may introduce in the Autumn Budget.
Flat-rate pension tax relief
The Chancellor is also said to be considering whether to replace the current tiered tax relief system on pension contributions with a single flat rate of around 30% for all savers. Tax relief is when the government adds back the tax you paid on the money you put into your pension, giving your savings a boost.
The current tax relief rates are:
20% for basic rate taxpayers;
40% for higher rate taxpayers; and
45% for additional rate taxpayers.
A flat rate could make the system simpler but may reduce incentives for higher earners to save.
Higher and additional rate taxpayers currently get 40% or 45% tax relief. This magnifies the impact of saving into a pension, meaning every £1 added to their pension costs them about 60p or 55p. If a flat 30% rate were introduced, that cost would rise to around 70p, which could make pension saving feel less rewarding for some.
It could also affect public sector workers in defined benefit schemes, such as teachers, NHS staff, and civil servants. Higher-rate taxpayers in these schemes may need to pay in more to get the same pension benefits, which could make saving through work seem less worthwhile.
Inheritance Tax (IHT) changes
The April 2027 change bringing pensions into IHT has already been confirmed. New speculation suggests the Chancellor might go further by:
changing the seven-year gifting rule; and
removing exemptions on certain gifts and transfers.
Lisa Picardo, Chief Business Officer UK at PensionBee, says:: “Rather than layering more complexity into the system, the focus should be on providing clear and consistent rules that give families the confidence to plan for the future.”
Key takeaways
Try not to act on speculation - early withdrawals could reduce tax efficiency, limit potential investment growth, and affect employer contributions.
Keep an eye out for announcements on and after 26 November - no measures will be confirmed until the Chancellor’s Budget announcement, when more details will become clear.
Stay informed - once any measures are confirmed, we’ll be here to help you understand what they could mean for your pension, whatever stage you’re at in your savings journey.
However things unfold, remember that pensions are designed for the long term. Taking time to focus on your goals can help you feel more confident about the road ahead.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
