Businesses and financial experts have sharply criticised a potential clampdown on salary sacrifice pension benefits in the upcoming Budget, warning that the move would amount to a stealth rise in Employer National Insurance and leave companies with even fewer ways to manage rising employment costs.
Rumours are circulating that the Chancellor could introduce a dramatic cap on the amount employees can sacrifice into their pensions, with some suggesting the annual allowance could be cut to as little as £2,000. Salary sacrifice agreements allow employees to give up part of their gross pay in exchange for non-cash benefits such as pension contributions. Because the adjustment is made before tax and National Insurance are calculated, both employers and employees reduce their NI liabilities.
While the Treasury is seeking ways to plug a significant fiscal gap, businesses warn that dismantling salary sacrifice would hit firms at a time when wage pressures are already intense. Many fear that if pension sacrifice becomes restricted, electric vehicle salary sacrifice schemes could be next, undermining one of the most effective levers employers have used to boost green transport adoption.
There is also deep uncertainty about when any changes would take effect. Some sources believe the government may act immediately on Budget Day; others think the cut could be delayed until April 2026. If implemented next year, employers may rush to lock in salary sacrifice arrangements before the window closes.
Luke James, Tax Director at Sheffield-based Gravitate Accounting, said capping the allowance would remove a critical financial tool when businesses need it most. “In today’s tight labour market and cost-sensitive business environment, removing or capping salary sacrifice will strip employers of a crucial flexibility lever,” he said. “Salary sacrifice is vital right now because it’s one of the few tools employers have to manage rising costs while still offering competitive, meaningful benefits. It allows firms to offer stronger benefits without increasing payroll spend, and it helps support employees’ financial wellbeing in a tax-efficient way.”
Chartered Wealth Manager Philly Ponniah, of Philly Financial, said any cap would feel like a tax hike in disguise rather than a move towards fairness. She warned that the consequences could extend far beyond pensions, with employers forced to rethink reward strategies and green transport schemes placed at risk. She also pointed out that parents earning around £100,000 may lose access to funded childcare hours, since salary sacrifice often keeps them under the threshold. “The timing question only adds stress,” she said. “If changes happen on Budget Day, businesses will have no time to prepare. Firms need stability, not surprise rule changes.”
Others warned of unintended consequences for the wider economy. Benjamin Woodhouse, co-owner of Balguard Engineering Ltd, said the proposal looked like “a headline grab with little thought behind it”, and questioned how the restriction might affect the car industry if EV schemes are eventually included. He fears Labour may gain only a marginal revenue boost while inflicting far greater damage on sectors reliant on vehicle leasing and employee mobility.
Financial adviser Michelle Lawson, Director at Lawson Financial in Fareham, expressed frustration at the growing instability surrounding tax and employment policy. “How anyone can plan beyond tomorrow now is beyond me,” she said. “Businesses plan months or years ahead around progression, investment and resource, and the Government may be about to throw further spanners into the works. Salary sacrifice benefits are tax-efficient but also help protect the workforce and keep them medically fit and in work. Removing them could make retention even harder.”
With the Budget only days away, businesses say they need clarity — and fear that a sudden move could undermine recruitment, employee wellbeing and long-term financial planning just as economic pressures on employers reach their peak.
