Pension savers utilizing salary sacrifice schemes to contribute to their retirement funds will now face a limit on their contributions before incurring National Insurance charges.
Rachel Reeves, in her Budget announcement, has confirmed a new annual cap of £2,000 on pension savings through salary sacrifice schemes.
Effective from April 2029, the cap will restrict pension contributions exceeding £2,000 from these schemes to be subject to National Insurance deductions.
This move is projected to generate £4.7 billion for the Treasury. The Chancellor stated, “I am implementing a £2,000 cap on pension contributions via salary sacrifice, with amounts exceeding this threshold to be taxed like regular employee pension contributions.”
Salary sacrifice involves sacrificing a portion of pre-tax salary for non-cash benefits like pension contributions. This lowers gross salary, reducing overall tax payments and decreasing National Insurance obligations for both employees and employers.
While there is currently no specific limit on pension savings through salary sacrifice, there is an annual allowance of £60,000 before tax applies.
Experts caution that imposing a cap on salary sacrifice pensions could lead to reduced retirement savings for individuals or potential closure of pension schemes by employers.
Steve Hitchiner, Chair of the Tax Group at the Society of Pensions Professionals, expressed concerns about the impact on employees’ take-home pay, particularly affecting basic rate taxpayers, and highlighted the potential reduction in pension savings due to this restriction.
