Pensions Bulletin 2025/48 - Budget Special

This Budget Special summarises and comments on announcements made in today’s Budget which are of potential relevance to pension schemes and their members.

For our regular weekly update see Pensions Bulletin 2025/47 which was also issued on 26 November 2025.

NIC advantages of pensions salary sacrifice to be capped – but not until April 2029

As expected (and as extensively trailed before the Budget – see Pensions Bulletin 2025/45), the Government has announced that the national insurance contributions' advantages of pensions salary sacrifice will be capped so that only the first £2,000 pa of salary that is sacrificed (in exchange for an equivalent employer contribution to a registered pension scheme) will generate NIC relief (both for the employer and the employee).

The operation of salary sacrifice will not be impacted by this measure, but payroll software will need to be able to distinguish between the sacrifice that continues to attract NIC relief and that which does not and so in effect is treated for NIC purposes (but not income tax purposes) as if the individual had received it. HMRC is promising to engage with stakeholders on this aspect and publish further guidance.

The Government anticipates raising £7.4bn from this measure over the first two years of its operation which is not intended to come into operation until 6 April 2029. However, the Office for Budget Responsibility says that the estimated yield is subject to uncertainties related to potential responses to the change by employers and employees, although its costings suggest that the impact will not be that significant.

PPF and FAS compensation to receive CPI-linked increases

The Budget Red Book states that, from 1 January 2027, members of the Pension Protection Fund and Financial Assistance Scheme will receive inflationary increases to their pre-1997 pension, capped at 2.5% pa.

This increase applies to those members whose original schemes provided for indexation on pre-1997 pensions and would broadly align pre-1997 indexation rules with those already in place for post-1997 pensions for PPF and FAS members. It is not clear at this stage which types of pre-1997 increases in members’ original schemes might be eligible, for example, if the original scheme only provided increases to GMPs, or only fixed increases, or if there was a cap lower than 2.5% pa. We expect this, and other details, will be clearer as the Pension Schemes Bill progresses through Parliament.

The PPF has confirmed that it is preparing to implement this change as soon as possible after it becomes law, with the first pension increase date to be January 2027 if the Bill becomes law in 2026 as expected.

Ability for members to benefit directly from DB surplus announced

The Budget Red Book states that the Government is building on the Pension Schemes Bill reforms that will “unlock some of the £160 billion of defined benefit pension scheme surplus” by “reducing the tax charge on surplus funds paid directly to members”. Only those over normal minimum pension age (age 57 from April 2028) will benefit and only where scheme rules and trustees permit it. The form that these benefits may take has yet to be specified, as has their tax treatment. This facility will become available from April 2027.

CDC scheme registration and other changes

The Government has announced that it will legislate to enable Unconnected Multi-Employer CDC Schemes (UMES) to apply to HMRC to become a registered pension scheme. It will also enable HMRC to refuse registration, or de-register, a CDC scheme if the CDC scheme is not authorised by the Pensions Regulator to operate, or authorisation is withdrawn.

CDC schemes, like Master Trust schemes, are required to be registered as pension schemes and authorised by the Pensions Regulator to be able to operate lawfully. Current tax law on scheme registration was designed for occupational pension schemes that are intended to be used for employees of the person establishing the scheme; however, both UMES and Master Trusts, by design, are established by separate entities that are not employers of the schemes. Specific amendments were made for Master Trusts so that they could also register with HMRC, and HMRC has the ability to decide not to register or to de-register a Master Trust scheme that is not authorised by the Pensions Regulator. The proposed amendments will bring UMES in line with Master Trusts for HMRC registration purposes.

The Government will also introduce a regulation making power so that HMRC can more efficiently legislate for necessary changes to CDC schemes or benefits in the future.

Inheritance Tax on unused pension funds and death benefits – easement delivered for Personal Representatives but complications for schemes

A policy paper accompanying the Budget states that, in relation to the forthcoming Inheritance Tax charge on unused pension funds and death benefits, Personal Representatives will be able to direct pension scheme administrators to withhold 50% of taxable benefits for up to 15 months and pay Inheritance Tax due in certain circumstances. Personal Representatives will also be discharged from a liability for payment of Inheritance Tax on pensions discovered after they have received clearance from HMRC. 

This will be legislated for in the Finance Bill and take effect from 6 April 2027.

State pension 2026 uprating announced

In her Budget speech, the Chancellor confirmed that both the Basic State Pension and Single Tier State Pension will increase by 4.8% in April 2026. This is in line with the annual increase in Average Weekly Earnings for May to July 2025, the highest measure this year under the triple lock mechanism (the greater of earnings, September’s CPI which was a 3.8% increase, and 2.5%). This means that the full Basic State Pension is expected to increase from £176.45 per week to £184.90 per week, and the full Single Tier State Pension from £230.25 per week to £241.30 per week.

The Budget Red Book states that the Government is also intending to ensure that pensioners whose sole income is the basic or new State Pension will not have to pay small amounts of tax via Simple Assessment from 2027/28 if their state pension exceeds the Personal Allowance from that point. The Government is exploring the best way to achieve this and will set out more detail next year.

The Department for Work and Pensions is expected to publish a policy paper setting out all the benefit and pension rates for 2026 to 2027 in the coming days.

Income tax and NIC thresholds frozen for another three years

The freeze on income tax thresholds for the 20% and 40% bands (outside Scotland) will continue beyond 2027/28 for a further three years as will the freeze on equivalent NIC thresholds. Separately, the NIC secondary threshold for employers (reduced to £5,000 at the previous Budget) will be frozen over the same period. Therefore, the next inflationary increase will occur for the 2031/32 tax year. The income tax additional rate threshold of £125,140 will also be frozen until this point.

The Government anticipates raising over £13bn in 2030/31 alone from this further freezing that was started by the previous Government.

Further significant increases in minimum wage rates

The Budget Red Book states that the National Living Wage for those aged 21 and over is to increase from £12.21 per hour to £12.71 an hour from 1 April 2026 – a 4.1% increase. National Minimum Wage rates for younger workers will also increase with the rate for 18 to 20-year-olds increasing from £10.00 per hour to £10.85 per hour – a 8.5% increase and another step towards aligning their rate with that for those 21 and over to create a single adult wage rate, which will take place over time. Under 18’s and apprentices will get a 45p rise taking them to £8.00 per hour. Further details are set out by the Low Pay Commission.

Mandatory tax adviser registration with HMRC on its way

In the latest development in a long running issue (see Pensions Bulletin 2024/43), HMRC has issued a paper that “provides details on the requirement for tax advisers who deal with HMRC on behalf of clients to register with HMRC”. The paper provides little concrete detail but says that this will be in the Finance Bill and that tax advisers will be required to register from May 2026, with at least a three-month transition period.

British Coal pension members to benefit from release of Investment Reserve

The Budget Red Book states that the Government will transfer the Investment Reserve Fund in the British Coal Staff Superannuation Scheme to the scheme’s Trustees. This will be paid out as an additional pension to members of the scheme.

Selected other Budget announcements

• ISA reform– the full £20,000 allowance will remain but £8,000 of this will now need to be designated for investments (as opposed to cash). However, over-65s will be able to invest the full allowance into cash. This will take effect from April 2027. There is also a statement that the Government will publish a consultation in early 2026 on the implementation of a new, simpler ISA product to support first time buyers to buy a home. Once available, this new product will be offered in place of the Lifetime ISA.
• Class 2 voluntary NICs – this is to be withdrawn for those living abroad so that it cannot be used as a means by such individuals to build up their NIC record for State pension entitlement.
• Savings income tax – from April 2027 there will be a 2% increase to the basic, higher and additional rates of saving income tax, increasing them to 22%, 42% and 47% per cent respectively.
• Dividend income tax – from April 2026 the ordinary rate of income tax on dividend income will be increased by 2% to 10.75% and the upper rate will be increased by 2% to 35.75%. The additional rate will remain unchanged at 39.35%.
• Property income tax – from April 2027 there will be a 2% increase to the basic, higher and additional rates of property income tax, increasing them to 22%, 42% and 47% per cent respectively.