Dangers of the UK’s new £2,000 pension cap

The announcement of a £2,000-a-year cap on pension salary sacrifice in the Autumn Budget has been framed as a necessary tightening. But beyond the spreadsheets and Treasury forecasts lies a less visible consequence: the potential erosion of workplace health and wellbeing support across the UK.

 

For many employers, salary sacrifice has long been part of a carefully balanced package – not just for pensions, but to help fund wider benefits that support staff health, resilience and productivity. When the cost of pensions rises, more often than not, something else has to give. For businesses operating on tight margins, especially small and medium-sized employers, that “something” may well be employee health provision.

 

Employers are already grappling with higher National Insurance contributions, inflation-driven wage pressures, minimum wage increases and rising operational costs. Adding further constraints to pension tax efficiency risks forcing difficult choices for business leaders trying to do the right thing for their employees. In many cases, health and well-being benefits – seen as discretionary rather than contractual – are the first to be reduced or removed when costs need to be cut. Recent research by Benenden Health shows that just 36% of employees describe their workplace health provision as ‘good’, while 6 in 10 rate it as ‘average’ or ‘poor’, highlighting the fragility of current offerings. (Survey of 4,000 UK adults by Opinium on behalf of Benenden Health, August 2025).

 

Workplace health support plays a crucial role in keeping people well and economically active. When employees can access timely help – whether for physical conditions or mental health challenges – they are more likely to stay in work, recover faster and remain engaged. Remove that support and the knock-on effects can be significant: higher sickness absence, reduced productivity and increased staff turnover.

 

Employers are an essential part of the country’s health ecosystem, helping to fill gaps with private cover for their staff and in doing so, relieving pressure where the public system is overstretched. Weakening their capability to offer this cover risks pushing more people back onto NHS waiting lists.

 

The impact on mental health deserves particular attention. Our recent research into workplace wellbeing paints a worrying picture: 87% of employees report having experienced mental health challenges at work, with stress cited as the leading reason for time off by 43% of respondents. Yet while 77% of employers feel they’ve consulted staff on preventative health benefits, just 18% of employees agree, illustrating a clear perception gap that threatens timely support. (Survey of 500 UK directors/decision makers and 2,000 employees by Opinium research on behalf of Benenden Health, June 2025.)

 

For many employees, employer-funded health support is the first and fastest route to help when they’re struggling. Without it, people may delay seeking care, allowing problems to worsen, or leave their workplace altogether. That has consequences not only for individuals, but for organisations and the wider economy.

 

There is also a broader cultural risk. Over the past decade, many employers have made genuine efforts to move beyond a narrow focus on pay, and towards a more holistic understanding of benefits and wellbeing efforts for their staff. This shift has helped normalise conversations about mental health, reduced stigma, and encouraged early intervention. If rising tax and pension costs force businesses to retrench these efforts, that progress could quietly unravel.

 

The irony is that this may ultimately increase pressure on public services. When employer-funded support is withdrawn, demand does not disappear – it is just displaced. More people are turning to NHS GPs, community mental health teams, and hospital services that are already struggling to meet demand. Employer-funded health support works alongside the NHS, helping people access certain care quicker and more conveniently and reducing pressure on public services rather than replacing them.

 

None of this is to argue against responsible management of pension tax relief. But fiscal policy does not exist in isolation. Changes to one part of the employment landscape inevitably ripple into others. When those ripples potentially impact health, workplace productivity and public services, they deserve serious consideration.

 

If the government’s ambition is to build a healthier, more productive workforce – and to reduce long-term sickness absence – then employer-led health provision should be seen as part of the solution and supported, not become an accidental casualty of pension reform.

 

As the details of the new cap are implemented, there is still an opportunity to consult with employers and assess the real-world impact. A workforce that is supported, healthy, productive and able to stay in work is not a luxury; it is a foundation of economic resilience.

 

While retirement security matters, so does the health of the people we rely on today. Policymakers should ensure that in trying to protect one, we do not inadvertently weaken the other.

 

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As CEO at Benenden Health, a not-for-profit healthcare provider offering affordable access to private healthcare for over 870,000 members across the UK, Tom Woolgrove is leading a quiet revolution – making quality healthcare affordable for everyday Britons without undermining the NHS

 

Main image courtesy of iStockPhoto.com and ThitareeSarmkasat