Autumn Budget 2025: Salary sacrifice hit and tax thresholds frozen

Tax thresholds will remain frozen and pension salary sacrifice will no longer be exempt from National Insurance, the Chancellor has confirmed in today's Budget.

Details of the budget were accidentally released early by the Office for Budget Responsibility before the Chancellor began her official speech at 12.30pm.

Rachel Reeves chose not to increase income tax rates themselves, but did extend a freeze on income tax and national insurance thresholds for another three years until April 2031 - a year longer than expected.

This means that the personal allowance before an employee begins paying tax will remain at £12,570 until then. This will raise £8bn for the Treasury, Reeves said.

According to economists, around 750,000 people will become higher-rate taxpayers (who earn between £50,271 and £125,140) due to the freeze on thresholds, and there will be close to a million new taxpayers in total.

Matthew Allen, lecturer in economics at the University of Salford, said: "This is effectively a tax rise through 'stealth'. As wages rise to keep up with inflation, more of that increase is taken by the Treasury."

However, Reeves announced that the government would "permanently lower tax rates" for more than 750,000 retail, hospitality and leisure properties, easing pressure on one of the sectors hit most by last year's announcement of increased employers' national Insurance contributions (NICs).

Salary sacrifice changes

Salary sacrifice pension contributions above £2,000 will attract NICs from April 2029. This means that pension contributions paid via salary sacrifice will be treated as ordinary employee pension contributions in the tax system, raising £4.7bn for the government.

Nick Burns, CEO of Reward Gateway, said salary sacrifice is an important incentive for both employees and employers. "Not only has it provided the fuel for building a healthy retirement fund, it also gives employees the opportunity to utilise their take-home pay in a way that works for them. Any restrictions of this helpful mechanism not only impact employees but also force employers to reconsider investing in their people," he said.

Burns said that salary sacrifice attracting NICs could "negatively impact" employers' ability to deliver growth by restricting hiring and potentially redundancies due to the added cost.

"These somewhat blunt, short-term instruments, to fix the problem of rising employer costs, will inevitably impact on the UK's economic recovery," he added.

Raj Bhundia, tax partner at Forvis Mazars, said the plans would be a "win for workers, for now".

"Employers and enrolled employees will continue to benefit from full NIC relief on salary sacrifice schemes until April 2029, regardless of the size of their sacrifice.

"Employers that haven't implemented salary sacrifice should look to introduce it now to benefit until April 2029 and make plans for the £2,000 restriction.

"A lot of water will pass under the bridge between now and 2029 and we could see further changes. There are, at least, another three Budgets between now and April 2029."

Apprenticeship boost

The government confirmed it would support a new Youth Guarantee scheme with £820 million investment, whereby young people who have been out of a job or education for 18 months would be offered a guaranteed paid work placement.

Meanwhile, small and medium-sized companies will be eligible for free apprenticeship funding for workers under the age of 25.

Alongside changes to salary sacrifice and tax thresholds, the Treasury announced a range revenue-raising measures including:

• A new mileage-based charge on electric vehicles and hybrid cars;
• A council tax surcharge on properties worth over £2m and increasing tax rates on dividends, property and savings income;#
• Changes to corporation tax to reduce the write-down allowance;
• Improvements to tax administration and debt collection that will raise £2.3bn;
• Reduced capital gains tax relief on disposals to employee ownership trusts.

In total, the measures proposed by the government will mean tax receipts are an all-time high of 38% of GDP by 2030-31.

Reeves said she was "yet to see a more credible or fairer working plan for working people". She said she was "building a tax system that is fairer for the future" by clamping down on loopholes and ensuring everyone paid their fair share. She also abolished the current two-child limit on receiving child benefit payments.

Yesterday, the government confirmed that the national living wage would increase by 4.1% to £12.71 an hour from April 2026, while the national minimum wage for 18 to 20-year-olds would go up from £10.00 to £10.85.

Looking forward, the OBR said the UK economy would grow by 1.5% on average, half a percentage point higher than it had previously predicted. However, it reduced expectations of productivity (GDP) increases by 0.3% due to "lower underlying productivity growth".

Opposition leader Kemi Badenoch called the chancellor's second budget "a smorgasbord of misery", where Reeves had announced "tax after tax".

"Last year she put up taxes by £40bn, the biggest tax raid in British history," Badenoch said. "She swore it was a one-off. Today she has broken every single one of those promises. If she had any decency she would resign.

"Last year we had the horrors of the Hallowe'en budget, this year it's The Night Before Christmas."