Pension savers participating in salary sacrifice programs for their retirement savings will face a limit on their contributions before incurring National Insurance charges.
Rachel Reeves, during her Budget announcement, confirmed a new annual cap of £2,000 on pension savings through salary sacrifice schemes.
Effective from April 2029, the cap means that any pension contributions exceeding £2,000 annually through salary sacrifice will be subject to National Insurance deductions.
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 pension contributions made through salary sacrifice, with amounts above this threshold taxed similarly to regular employee pension contributions.”
Salary sacrifice involves sacrificing a part of your pre-tax income for non-cash benefits like pension contributions. By reducing your gross salary before tax and National Insurance are calculated, you lower your overall tax liability, and your employer pays less National Insurance.
Currently, there is no limit on pension savings through salary sacrifice, although there is an annual allowance of £60,000 for tax-free contributions to retirement funds.
Experts caution that capping pension contributions through salary sacrifice could lead to reduced retirement savings for individuals or even the closure of such schemes by employers.
Steve Hitchiner, Chair of the Tax Group at the Society of Pensions Professionals, expressed concerns, stating, “Restricting salary sacrifice for pensions will impact the take-home pay of millions of employees, particularly basic rate taxpayers, and represents a form of taxation on working individuals, if not in name.”
Moreover, it presents an additional financial burden for employers and is expected to diminish pension savings.