Pension savers participating in salary sacrifice programs for their retirement funds will soon face a limit on the amount they can contribute before incurring National Insurance charges.
Rachel Reeves has announced a new annual cap of £2,000 on pension savings through salary sacrifice schemes in her Budget speech. Effective from April 2029, any 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 contributions above £2,000 into a pension via salary sacrifice will be taxed like standard employee pension contributions.
Currently, there is no restriction on the amount individuals can invest in their pensions through salary sacrifice, although there is an annual allowance of £60,000 before tax implications come into play.
Experts caution that imposing a cap on salary sacrifice pensions could lead to reduced retirement savings for individuals or potential closure of such schemes by employers.
Steve Hitchiner, Chair of the Tax Group at the Society of Pensions Professionals, expressed concerns over the impact of limiting salary sacrifice on employees’ take-home pay, particularly affecting basic rate taxpayers, and highlighted the potential negative consequences on pension savings.
Salary sacrifice involves forgoing a portion of pre-tax income for non-monetary benefits like pension contributions, resulting in lower tax payments and reduced National Insurance contributions for both employees and employers.
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