Chancellor Reeves could target pensions in upcoming Budget
13th October 2025
Almost 70% of all pension tax relief benefitted higher-rate and additional-rate taxpayers in 2023-24 – making pension reforms a strong contender for inclusion in chancellor Rachel Reeves’ upcoming Autumn Budget, NFU Mutual warns.
Data from HM Revenue & Customs (HMRC) analysed by NFU Mutual shows that 55% of pension tax relief benefits higher-rate taxpayers paying the 40% rate of income tax and 13% benefits 45% taxpayers – with only a third going to basic rate taxpayers.
Gross pension income tax and national insurance contribution relief in 2023 to 2024 is estimated to be £78.2 billion – up from £72.1 billion in 2022 to 2023.
Sean McCann, chartered financial planner at NFU Mutual, the financial advisory firm, said: “Pension tax relief and the national insurance foregone on employer pension contributions is a large expense to the Treasury. Chancellor Rachel Reeves may look to reduce this cost particularly as the lion’s share goes to higher and additional rate taxpayers.”
How can pensions be targeted?
The expert pointed to four possible changes to pensions which the chancellor could include in the upcoming Autumn Budget to reduce the cost to the Treasury.
- Reduce the amount that individuals can pay into pensions each year.
Currently most people can pay in up to the level of their earnings, capped at £60,000 a year. This was increased in March 2023 from £40,000 by Jeremy Hunt, former chancellor in the previous Conservative government.
Bringing this down to £25,000 a year would have the biggest impact on 40% and 45% taxpayers and those late in career seeking to maximise pension contributions to make up for lost time in the run-up to retirement.
Mr McCann said: “This change has the advantage of being simple to introduce from an administrative perspective – unlike the introduction of a flat rate of tax relief on all pension contributions, which would bring complexity, particularly for employers and employees.”
- Charge employer National Insurance contributions (NICs) on money paid into employees’ pensions.
Currently employers don’t pay NIC on money they pay into employees’ pensions – saving up to 15% on the same amount paid as salary.
Employees also avoid NIC and income tax on these employer pension contributions, as they are not treated as a ‘Benefit in Kind’.
Salary sacrifice arrangements allow employees to give up salary in exchange for a larger employer pension contribution – meaning that employers and employees avoid NIC.
HMRC data from July 2025 shows the cost of National Insurance relief on employer contributions (including those made via salary sacrifice) is estimated to be £24 billion in 2023 to 2024, down from £24.3 billion in 2022 to 2023.
“The chancellor could levy NIC at a lower rate of 5% on employer pension contributions to clawback some of this cost; this would still make it attractive for employers to pay money into their employees pensions,” Mr McCann said.
- Charge income tax on all pension death benefits
Currently, if a pension holder dies before age 75, in most cases their beneficiaries do not pay income tax on the lump sum or income paid to them.
If the pension holder dies from age 75, their beneficiaries are assessed for income tax on any lump sum or income paid to them, the expert explained.
Mr McCann said that the chancellor could seek to abolish this exemption, with families being assessed for income tax on any payments from their late loved one’s pension.
He added: “Coupled with the government’s proposal to include unspent pensions in IHT calculations from April 2027, this would be a double blow for some bereaved families.”
- Cut maximum tax-free lump sum limit to £150,000.
In most cases you can take 25% of your pension as a tax-free lump sum from age 55 (57 from 2028), the expert continued.
Currently the maximum amount that can be taken across all an individual’s pensions is capped at £268,275, unless they have registered for protection, which may give them a higher figure.
Reducing the limit to £150,000 would hit those who have pension benefits valued at more than £600,000 or expect to have in the future.
Mr McCann added: “Reducing the tax-free cash limit to £150,000 would impact those who have or are likely to have in the future pension savings of more than £600,000 by exposing more of their funds to tax when they take the benefits.”
‘’Given that most people have pensions valued at significantly less than £600,000, it would be viewed as a tax-raising measure focused on wealthier investors.”
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