Pension savers participating in salary sacrifice schemes will now face a limit on their contributions before incurring National Insurance charges. Rachel Reeves announced a new £2,000 annual cap on pension savings through these schemes in the latest Budget.
Effective from April 2029, contributions exceeding the £2,000 threshold annually will no longer be exempt from National Insurance. This adjustment is projected to generate £4.7 billion for the Treasury. The Chancellor emphasized that contributions above the cap will be taxed similarly to other employee pension contributions.
Salary sacrifice involves reallocating part of pre-tax income for non-monetary benefits like pension contributions, resulting in reduced gross salary and lower overall tax payments. While there is currently no specific cap on pension savings via salary sacrifice, there is a general £60,000 annual allowance before incurring tax liabilities.
Experts caution that limiting salary sacrifice pensions could lead to reduced retirement savings for individuals or potential closure of pension schemes by employers. Steve Hitchiner from the Society of Pensions Professionals highlighted the impact on employees’ take-home pay, especially for basic rate taxpayers, and the potential reduction in pension savings due to this restriction.