16 December 2025
general
In the wake of the government's much-anticipated Autumn Budget, you might be left with conflicting feelings about the future of your finances.
From the “mansion tax” to extended tax threshold freezes, some elements of the Budget have no doubt left a sour taste.
But in the case of pensions, many savers may be heaving a sigh of relief following the chancellor’s announcements. The rumoured “sweeping pension reforms” did not come to fruition. The tax-free lump sum rules remain untouched, as do the rates for tax relief.
That said, the Budget did include multiple announcements that could impact your pension savings and wider retirement income.
Read on to discover five ways your pension may be affected by the changes announced in the 2025 Autumn Budget and what you could do next.
1. Salary sacrifice tax benefits will be capped at £2,000 a year
From April 2029, the tax-efficient benefits of paying into a workplace pension via salary sacrifice will only be available for £2,000 of contributions a year.
According to Sky News, around 20% of the workforce are estimated to be using salary sacrifice to pay into a pension.
Typically, employers offering salary sacrifice will deduct an employee’s pension contributions from their pre-tax salary. By taking the funds before Income Tax and National Insurance (NI) are calculated, savers can reduce their salary’s tax bill.
At the time of writing, and in place until 2029, you can contribute through salary sacrifice tax-efficiently – up to your Annual Allowance, which is £60,000 or your total earnings, whichever is lower, for most earners.
From 2029/30, NI will be charged on contributions over £2,000 a year at the following rates:
|
Taxpayer |
NI rate |
|
Employees earning up to £50,270 |
8% |
|
Employees earning over £50,270 |
3% |
|
Employers |
15% |
Tax relief for Income Tax will continue to be available at your marginal rate.
Although this measure is years away from coming into force, it may be worth speaking to a financial planner if you believe it will affect you. Together, you and your planner can explore the possible impact of the salary sacrifice cap on your retirement savings and discuss potential solutions.
2. Income Tax thresholds are frozen for an additional three years
The chancellor announced that the Income Tax thresholds will remain frozen until 2031. Having first been introduced in 2021, the freeze was previously expected to end in 2028.
Consequently, as you draw down your pension, you may be subject to a larger tax bill than you had expected. Many retirees will draw an increasing level of income to account for inflation. With the tax thresholds frozen, more of your income may be taxable and you may even fall into a higher tax bracket.
In fact, PensionsAge reports that, in 2024/25, there were more than twice as many retirees aged 66 and over paying an effective tax rate of 60% compared to 2021/22.
Find out more: The 60% tax trap for earnings over £100,000
Remember, your private pension isn’t the only income source that counts towards your Income Tax bill. Other income streams, such as State Pension payments, investment returns, savings interest, and property income, can also contribute to your total taxable earnings.
As such, it’s often worth taking care to avoid accidentally moving into a higher tax bracket. A financial planner can help you assess and monitor all sources of retirement income to ensure it is both sustainable and tax-efficient.
3. State Pension payments will rise by 4.8% in April 2026
On a more positive note, the chancellor announced that the new State Pension will rise by 4.8% from April 2026.
The triple lock ensures State Pension payments rise by the rate of inflation, average earnings growth, or 2.5% - whichever is highest. In this instance, earnings growth was the deciding figure, averaging at 4.8% for May to July 2025.
As such, those entitled to the full new State Pension will receive £12,548 in the 2026/27 tax year.
This annual figure is notably close to the £12,570 Personal Allowance – which, as mentioned above, is frozen until 2031. This is the amount you can earn before triggering an Income Tax bill.
Therefore, the government has announced that retirees claiming the State Pension as their sole retirement income will not be subject to tax. While the rules around this remain unclear, it seems just £23 of additional income a year could trigger an Income Tax bill.
4. Access to voluntary Class 2 National Insurance contributions will be removed for overseas individuals
In 2025/26, UK citizens living overseas can choose to pay Class 2 National Insurance contributions (NICs) to retain their eligibility for benefits like the State Pension.
However, from April 2026, voluntary Class 2 NICs will be unavailable for those living overseas. Instead, these individuals will have to pay the higher Class 3 rate if they want to avoid a gap in their NI record.
As of 2025/26, the voluntary NICs rates are as follows:
As a result, you could face a larger tax bill if you currently live overseas (or plan to) and want to ensure you’ll be eligible for the full new State Pension when you retire.
5. Unused pension pots will still be included in estates for Inheritance Tax purposes
Despite speculation that the government would reverse or alter its plans to include unused pension pots in the scope of Inheritance Tax (IHT), the legislation is still set to come into effect from April 2027.
While pension pots are now ringfenced from IHT charges, the upcoming changes will mean your retirement savings will be included in your estate. As a result, more of your wealth could be subject to a 40% IHT bill when passed on to a loved one (other than your spouse or civil partner) after you die.
As well as reiterating the previously announced changes, the chancellor also clarified that the IHT charge can be paid directly by the pension provider. Executors of your estate can ask for up to 50% of the total fund to be withheld for up to 15 months, which the pension scheme can use to pay HMRC directly.
If you’re unlikely to use your full pension pot, and plan on passing a portion down to the next generation, it may be worth consulting a financial planner.
Get in touch
If you’re worried about how the Autumn Budget will affect your pension savings, retirement income, or any other areas of your financial plan, get in touch to find out how we can help. Email enquiries@jesellars.co.uk or call 01934 875 919 to learn more.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning, cashflow planning, or tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pensions Regulator.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.
