Pension savers participating in salary sacrifice programs to build their retirement funds will soon face a limit on their contributions before incurring National Insurance charges.
Rachel Reeves unveiled in the Budget a new cap of £2,000 per year on pension savings through salary sacrifice schemes, effective from April 2029. Contributions exceeding this cap 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 exceeding the £2,000 cap will be taxed similarly to other employee pension contributions.
Salary sacrifice involves reducing a portion of your pre-tax salary for non-cash benefits like pension scheme payments. This practice reduces your gross salary before tax and National Insurance deductions, leading to lower overall tax payments and reduced National Insurance contributions for your employer.
While there is currently no limit on pension savings via salary sacrifice, a £60,000 annual allowance applies to retirement contributions before taxation. Experts caution that capping salary sacrifice pensions could result in lower retirement savings for individuals or the closure of such schemes by employers.
Steve Hitchiner from the Society of Pensions Professionals expressed concerns that restricting salary sacrifice for pensions could reduce take-home pay for many employees, particularly basic rate taxpayers. This move could impact pension savings and add to employers’ costs.
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