Businesses and financial experts have sharply criticized a possible crackdown on salary sacrifice pension benefits in the coming budget, warning that the move would amount to a secret increase in employer welfare and leave companies even less able to cope with rising employment costs.
Rumors are circulating that the Chancellor could introduce a drastic cap on the amount workers can pay into their pensions. Some suggest the annual allowance could be cut to just £2,000. Salary sacrifice agreements allow employees to forego part of their gross salary and receive non-cash benefits such as pension contributions. Because the adjustment occurs before tax and national insurance are calculated, both employers and employees reduce their NI liabilities.
As the Treasury looks for ways to close a significant budget gap, businesses are warning that cutting wage cuts would hit at a time when wage pressures are already strong. Many fear that if pension sacrifices are restricted, electric vehicle wage sacrifice programs could be next, undermining one of the most effective levers employers have used to encourage the adoption of green transportation.
There is also a lot of uncertainty about when changes would come into effect. Some sources believe the government could act immediately on budget day; Others believe the cut could be delayed until April 2026. If implemented next year, employers could rush to reach salary sacrifice agreements before the window closes.
Luke James, tax director at Sheffield-based Gravitate Accounting, said capping the allowance would remove an important financial tool when businesses need it most. “In today’s tight labor market and cost-sensitive business environment, eliminating or limiting salary sacrifice will deprive employers of a critical lever of flexibility,” he said. “Salary sacrifice is critical right now because it is one of the few tools available to employers to manage rising costs while offering competitive, meaningful benefits. It allows companies to offer stronger benefits without increasing payroll expenses, and it helps support employees’ financial well-being in a tax-efficient manner.”
Chartered wealth manager Philly Ponniah of Philly Financial said any cap would feel like a tax increase in disguise rather than a step toward equity. She warned that the impact could extend well beyond pensions, with employers forced to rethink their compensation strategies and green transport systems put at risk. She also pointed out that parents earning around £100,000 could potentially lose access to funded childcare hours as salary cuts often keep them below the threshold. “The time issue just adds stress,” she said. “When changes happen on budget day, companies don’t have time to prepare. Companies need stability, not surprise rule changes.”
Others warned of unintended consequences for the overall economy. Benjamin Woodhouse, co-owner of Balguard Engineering Ltd, said the proposal seemed like “a headline grabber with little thought” and questioned what impact the restriction could have on the car industry if electric vehicle schemes are eventually included. He fears Labor could see only a small increase in sales while causing far greater damage to sectors that rely on vehicle leasing and employee mobility.
Financial adviser Michelle Lawson, director at Lawson Financial in Fareham, expressed frustration at growing instability in tax and employment policy. “How anyone can plan beyond tomorrow now is beyond me,” she said. “Companies are planning months or years in advance for advancements, investment and resources, and the government may be about to add even more stones to the table. Salary sacrifice benefits are tax efficient, but also help protect the workforce and keep them medically fit and employed. Removing them could make retention even more difficult.”
With the Budget just days away, businesses say they need clarity – and fear a sudden move could jeopardize recruitment, employee welfare and long-term financial planning, just as economic pressures on employers are at their peak.
