Contractors’ Pensions Exposed: Contributions Could Be on the Line
Summary (lede)
This week’s Budget could disrupt the favourable tax environment enjoyed by many UK professionals operating via personal service companies (PSCs). Rumours suggest a significant clampdown on the use of salary sacrifice for pension contributions, threatening a long-standing and valuable benefit for contractors.
The Traditional PSC Advantage
For decades, skilled professionals have utilised PSCs to manage their income in a tax-efficient manner. The typical approach involves:
Paying profits at the corporation tax rate (currently 19%)
Drawing a minimal salary, within the personal allowance
Extracting further funds as dividends (with no National Insurance contributions)
Investing surplus company cash into the director’s pension scheme
This structure has enabled contractors to accumulate pension savings efficiently. However, this arrangement is now facing scrutiny.
Salary Sacrifice Under Review
Persistent reports indicate that the government is targeting salary sacrifice schemes, particularly those related to pension contributions. According to sources and analysis by Ian Holloway, HMRC has commissioned two research projects on the subject in recent years. The 2022/23 study examined three hypothetical policy options:
| Option | Description |
|---|---|
| 1 | Remove NIC exemption for both employer/employee pension contributions, retain income tax relief |
| 2 | Remove both tax and NIC advantages for pension contributions |
| 3 | Cap the NIC exemption for pension contributions at £2,000 per year (employer and employee) |
The Financial Times has reported that a cap on NIC exemption (Option 3) was under serious consideration, potentially raising £2bn annually. More recent speculation points to a more extensive reform, with anticipated revenues of £3bn–£4bn per year, suggesting a move toward Option 1 or 2.
How the System Works Today
Employers can currently contribute any amount to an employee’s pension scheme, and these contributions are exempt from employer NICs. However, tax relief is subject to the individual’s annual allowance (usually £60,000). For high earners, this allowance tapers down on incomes above £260,000, but not below £10,000. Excess contributions trigger an annual allowance tax charge at the individual’s top marginal rate, which schemes can pay directly if the charge exceeds £2,000.
The Consequences of NIC Changes
Should employer and/or employee NIC exemptions on pension contributions be removed, the cost of funding retirement through pensions will increase sharply:
If employer NIC is applied, companies will pay an additional 15% on pension contributions
If employee NIC is also levied, the benefit becomes even less attractive
The increased cost could discourage pension savings for contractors and employees alike
Such measures run counter to long-term retirement savings policy and risk undermining personal responsibility for future financial security.
PSCs in the Firing Line
Contractors whose PSCs make pension contributions on their behalf will be directly affected by any removal or reduction of the NIC exemption, regardless of whether a formal salary sacrifice arrangement exists. For many, this could mean a 15% or greater increase in the cost of pension saving.
Will Reform Happen—And When?
With multiple Financial Times reports and explicit mentions in Budget planning documents, it appears likely that employer pension contributions will, at some stage, attract employer NICs. Changes of this magnitude require pension scheme rule amendments and may not be feasible for implementation by April 2026, but the direction of travel is clear.
What Should Accountants and Contractors Do?
Prudent steps in the short term include:
Reviewing company and personal cash needs to assess whether further pension contributions should be made before rule changes
Avoiding specific pension advice unless authorised by the Financial Conduct Authority
Reviewing profit extraction policies and considering the option of retaining profits for future extraction as capital gains (noting that CGT rules can change unexpectedly)
Whatever you do, don’t stand still.
Quotes & Sources
Ian Holloway, payroll expert, highlighted the government’s research into salary sacrifice and its potential implications (AccountingWEB, June 2025).
The Financial Times has reported on the likelihood and potential structure of these changes (FT, November 2025).
A selection of professional commentary from AccountingWEB’s own discussion threads demonstrates a range of reactions—from resignation at the loss of a valuable benefit to concerns over the broader impact on employer pension costs and contractor behaviour.
Next Steps for UK Contractors
Consult with your accountant to understand your current pension position
Monitor Budget announcements for confirmed policy changes
If authorised, consider advancing pension contributions ahead of legislative change
Review the long-term profit extraction and retirement planning strategy for your PSC
The tax landscape is shifting. Contractors and their advisers must remain vigilant and proactive to protect their financial future.
