Pension savers using salary sacrifice schemes to build their retirement funds will face a limit on their contributions before incurring National Insurance charges. Rachel Reeves, in her Budget announcement, confirmed a new £2,000 annual cap on pension savings through salary sacrifice schemes. Effective from April 2029, contributions exceeding this cap will be subject to National Insurance.
The introduction of this cap is projected to generate £4.7 billion for the Treasury. The Chancellor stated, “I am implementing a £2,000 cap on salary sacrifice contributions to pensions, with amounts above this threshold taxed similarly to other employee pension contributions.”
Salary sacrifice involves forgoing a portion of your pre-tax salary for non-cash benefits like pension contributions. By reducing your gross salary before tax and National Insurance calculations, you pay less tax overall, and your employer pays lower National Insurance contributions.
While there is currently no specific limit on pension savings through salary sacrifice, there is an annual allowance of £60,000 for tax-free retirement savings. However, experts caution that capping these schemes could result in reduced retirement savings for individuals or potential closure of such programs by employers.
Steve Hitchiner, Chair of the Tax Group at the Society of Pensions Professionals, expressed concerns about the impact of restricting salary sacrifice on employees’ take-home pay, especially for basic rate taxpayers. He highlighted that this move could act as an indirect tax on working individuals and reduce overall pension savings.
Overall, the decision to impose a cap on salary sacrifice pension contributions has raised significant concerns among industry professionals and savers alike.