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Pensions UK and the Federation of Small Businesses have sent a joint letter to Chancellor Rachel Reeves, urging her not to change salary sacrifice.
Vicky ShawFriday 21 November 2025 13:51 GMT
Salary sacrifice schemes have tax advantages (Gareth Fuller/PA Archive) (PA Archive)
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Any potential clampdown on salary sacrifice or pensions tax relief in next week’s Budget would risk damaging public confidence in the pensions system and undermining economic growth, organisations representing the pensions industry and businesses are warning.
Pensions UK and the Federation of Small Businesses (FSB) have sent a joint letter to Chancellor Rachel Reeves, urging her not to curb salary sacrifice schemes or wider pensions tax relief.
Ahead of the November 26 Budget, the organisations warned that speculation alone over potential changes is already eroding saver confidence, with increases in inquiries from savers and the potential for people making unnecessary early pension withdrawals.
It is also causing uncertainty for schemes and employers, they argued.
The letter to the Chancellor says: “Limiting salary sacrifice will hit working people trying to save for a better pension in retirement – including those on lower-than-average earnings for whom every penny counts both in working life and at retirement.”
It adds: “In the context of auto-enrolment, many employers use salary sacrifice to boost the contributions of those lower-earning workers that they enrol into defined contribution schemes.
“For instance, in the government-backed Nest scheme, nearly half of large employers contribute above the statutory minimum rate of 3%, with over 14% covering the full minimum contribution of 8%.
“If salary sacrifice was removed, it’s inevitable that lower-earning workers currently benefiting from these arrangements would experience less employer generosity and higher deductions from their pay.”
Salary sacrifice schemes allow workers to give up a portion of their regular pay in return for a different benefit, such as pension contributions. The schemes have tax advantages for employees and for employers.
Pensions UK and the FSB said many employers rely on salary sacrifice schemes to support staff retention and reward – and higher costs and operational disruption would make it harder to offer competitive benefits, invest in growth, or plan effectively.
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Payroll systems would also need adjustment, agreements would have to be revisited, and staff resources diverted, they argued.
Pensions UK said feedback from members in November found the vast majority are concerned about potential pension tax changes, agreeing that rumours are damaging confidence in pension saving.
The organisation, collected received 69 responses, said around a third of schemes had already seen increased member contact since speculation started, almost entirely about withdrawing tax-free cash.
Three-quarters of the schemes it was in contact with believe savers are likely or very likely to alter retirement contributions or decisions if rumoured reforms go ahead.
Zoe Alexander, director of policy at Pensions UK, said: “The pension system relies on stability and predictability. Savers and employers can only plan with confidence when the rules are clear and consistent.
“Any change to salary sacrifice would inject uncertainty into a system that needs long-term trust, not sudden shocks. It would add operational pressure for employers and risk undermining the retirement prospects of working people across the country.”
