Autumn Budget 2025: Part 4 - Could Employer Pension Contributions Be Taxed?

Employer pension contributions have long been a cornerstone of retirement planning in the UK. For many, they represent a tax-efficient way to save for the future, especially when combined with salary sacrifice arrangements. But with Chancellor Rachel Reeves facing a significant fiscal deficit, these contributions may no longer be off-limits.

In part 4 of our series, we explore whether employer contributions could be taxed, what changes have already been announced, and what this means for individuals and businesses alike.

What's Changing Already?

In her Autumn Budget 2024, Reeves announced the following changes:

• Employer National Insurance (NI) contributions will rise from 13.8% to 15% from April 2025.
• The threshold at which employers start paying NI will drop from £9,100 to £5,000.
• The Employment Allowance will increase from £5,000 to £10,500, offering some relief to smaller businesses.

These changes alone will raise £25 billion annually by 2029 - but they may not be the end of the story.

Could Employer Pension Contributions Be Next?

Currently, employer pension contributions are exempt from NI, making them highly tax-efficient. But this exemption costs the Treasury nearly £24 billion a year.

Proposals under consideration include:

• Applying NI to all employer pension contributions.
• Capping the NI exemption (e.g., only the first £2,000 of salary sacrifice per year).
• Abolishing salary sacrifice arrangements entirely.

These measures could raise billions—but they risk undermining pension saving incentives and increasing costs for employers.

Example: Impact on a Typical Employee

Let's say an employee earns £32,000 and contributes 5% to their pension via salary sacrifice. Here's how the outcome varies depending on how much of the NI saving the employer passes on:

If NI is applied to employer contributions or salary sacrifice is restricted:

• Employers may stop sharing NI savings.
• Employees could lose hundreds in annual pension top-ups.
• Businesses may reduce pension generosity to offset rising costs.

What Does This Mean for You?

Whether you're an employee, business owner, or financial adviser, these changes could affect:

• Retirement outcomes: Less generous pension schemes or reduced contributions could mean lower pension pots over time.
• Business strategy: Employers may need to reassess benefit structures and workforce planning.

What Should You Do Now?

• Employees: Review your pension contributions and understand how salary sacrifice works.
• Employers: Consider the cost implications and explore alternative benefit strategies.
• Advisers: Prepare clients for potential changes and help them optimise their pension planning.

At Morgan Lloyd, we're committed to helping individuals and businesses navigate pension reform with clarity and confidence.

Coming Next: Will the Chancellor Rethink Inheritance Tax on Pensions?

In Part 5, we'll revisit the government's plan to include pension funds within Inheritance Tax from April 2027. With strong industry opposition and scrutiny from the House of Lords, we'll explore whether the Autumn Budget 2025 could be the moment Chancellor Rachel Reeves considers alternative approaches - such as removing the LSDBA, taxing beneficiaries directly, or reintroducing a flat-rate death tax.