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There was mixed news for pensioners and those approaching retirement in this year’s Budget. The Chancellor confirmed a 4.8% increase in the State Pension next April but also announced a cap on salary sacrifice pension contributions, affecting workplace pension savers.
While the above-inflation rise in the State Pension is welcome, the new restrictions on salary sacrifice may have a significant impact on those saving for retirement through some workplace schemes.
Here, we explain what’s changing – and what’s not – and why Budget announcements shouldn’t deter you from putting money aside for your future.
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If you’re considering seeking professional financial advice on the options available to you, nationwide advice firm HUB Financial Solutions is offering you a free initial consultation with an expert retirement specialist. There’s no obligation; it’s to help you understand your options and how our services work. If you choose to receive paid-for regulated advice, we’ll explain how that works and the fees involved.
HUB Financial Solutions is rated ‘Excellent’ on Trustpilot (Mar 2026). With investing, your capital is at risk.
Tax-free cash and pension tax relief left unchanged
After months of speculation that the Chancellor would target the amount of tax-free cash you can take from your pension, the current limit was left unchanged. This means it is usually possible to take up to 25% of your pension tax-free once you reach the age of 55 (rising to 57 in 2028) up to a maximum of £268,275. There were also no changes to income tax relief, which remains at an individual’s marginal rate.
You can find out more about tax-free cash in our guides How much tax-free cash can I take from my pension? and What’s the best way to use my 25% pension tax-free cash? and about pension tax relief in our article How does pension tax relief work?
State Pension to increase by 4.8%
The State Pension is set to rise by 4.8% in the 2026/27 tax year, the Chancellor confirmed in the Budget, thanks to the triple lock guarantee. This ensures pensions increase each year based on whichever is highest: average earnings, September’s inflation (CPI), or a 2.5% minimum. With earnings growth reaching 4.8% and inflation at 3.5%, next year’s increase will follow the higher earnings figure. You can learn more about the triple lock in our guide What is the pension triple lock?
This means the full new State Pension will climb from £230.25 a week to £241.30 in April 2026, providing an extra £575 annually. However, the exact amount you will get will depend on your National Insurance record. For those on the basic State Pension who reached State Pension age prior to April 2016, weekly payments will rise from £176.45 to £184.90, adding around £440 a year. Find out more in our article What will the State Pension be in 2026?
Amount of salary that workers can sacrifice into workplace pensions capped at £2,000 a year.
Salary sacrifice is an important feature of many workplace pension schemes. It allows you to give up part of your salary, which your employer then contributes directly to your pension.
Because contributions are paid before tax and National Insurance, your taxable income is reduced. This can lead to higher take-home pay compared with making standard pension contributions, while also boosting the total amount going into your pension — particularly if your employer passes on the National Insurance savings.
However, it was announced in the Budget that from April 2029, any salary sacrifice pension contributions above £2,000 will be subject to National Insurance.
Gary Smith, senior partner and retirement specialist at wealth management firm Evelyn Partners, said: “Restricting salary sacrifice is a tax penalty on people trying to do the right thing by saving efficiently for their own retirement and it’s yet another National Insurance cost increase imposed on firms, which may result in reduced pay and pension benefits for private sector employees. Some employers who currently pay more than the auto-enrolment minimum on behalf of their employees will be inclined to reduce their contribution rates or other employee benefits to adjust for these changes.
“Under the current minimum auto-enrolment scheme percentage contribution rates, someone earning less than £40,000 a year will not be affected by these changes.
“For those who earn more, it will depend on how firms react and how they manage their pension systems. It could be that many white-collar workers will just see their monthly NI bill go up and take-home pay go down if they study their payslip.”
Despite the negative impact changes to salary sacrifice could have, it’s vital to remember the significant tax benefits pensions have.
Patrick Heath-Lay, Chief Executive Officer of People’s Partnership, provider of People’s Pension to seven million savers, said: “Like many, we had hoped salary sacrifice would not be touched in the Budget: this will have a significant impact on some savers and on business. However, even with salary sacrifice capped at £2,000 from 2029, pensions remain strongly tax advantaged.
“Tax relief on pension contributions added £70.8bn to savers’ pension pots last year. Restricting salary sacrifice will make the pensions tax regime less generous but the tax raised will be a small portion of available tax breaks: likely to be less than 5% of total tax relief in 2029. We would urge pension savers not to mistake this change for a fundamental overhaul of the pension tax system: these changes should not dent confidence in pension saving.”
Learn more in our article What could changes to salary sacrifice mean for your pension?
Advertisement
If you’re considering seeking professional financial advice on the options available to you, nationwide advice firm HUB Financial Solutions is offering you a free initial consultation with an expert retirement specialist. There’s no obligation; it’s to help you understand your options and how our services work. If you choose to receive paid-for regulated advice, we’ll explain how that works and the fees involved.
HUB Financial Solutions is rated ‘Excellent’ on Trustpilot (Mar 2026). With investing, your capital is at risk.
A final thought…
Overall, the 2025 Budget has brought a mix of positive and not-so-good news for pensioners and those planning for retirement. While the State Pension increase offers a welcome boost, changes to salary sacrifice mean it’s more important than ever to review your existing pension strategy.
Staying informed and making the most of available tax advantages can help ensure your retirement savings continue to work as hard as they possibly can for you.
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