Pension savers utilizing salary sacrifice schemes to fund their retirement will soon face a limit on their contributions before incurring National Insurance charges.
Rachel Reeves, through the Budget, has confirmed a new annual cap of £2,000 on pension savings made via salary sacrifice schemes, effective from April 2029. Contributions exceeding this limit will be subject to National Insurance deductions.
The introduction of this cap is projected to generate £4.7 billion for the Treasury. The Chancellor emphasized that any pension contributions above the £2,000 threshold will be taxed similarly to standard employee pension contributions.
Salary sacrifice involves agreeing to allocate a portion of pre-tax salary for non-cash benefits, like pension contributions. By reducing the gross salary before tax and National Insurance are calculated, individuals pay less tax overall, while employers also save on National Insurance contributions.
While there is currently no specific cap on pension savings via salary sacrifice, there is an overall annual allowance of £60,000 before tax liability kicks in. However, experts caution that capping salary sacrifice pensions could lead to reduced retirement savings for individuals or even the closure of pension schemes by some employers.
Steve Hitchiner, Chair of the Tax Group at the Society of Pensions Professionals, expressed concerns about the impact on employees’ take-home pay and overall pension savings due to the restrictions on salary sacrifice for pensions.
According to a Treasury spokesperson, the reforms aim to ensure fairness by aligning salary sacrifice contributions above £2,000 with other pension contributions, affecting only those making the largest pension contributions while safeguarding 95% of workers earning under £30,000 who utilize salary sacrifice.
