Pension savers who participate in salary sacrifice schemes for their retirement savings will now face a limit on their contributions before incurring National Insurance charges.
In the recent Budget announcement, Rachel Reeves revealed a new annual cap of £2,000 on pension savings via salary sacrifice schemes starting from April 2029. Contributions exceeding this limit will no longer be exempt from National Insurance.
This change is estimated to generate £4.7 billion for the Treasury. The Chancellor stated, “I am implementing a £2,000 cap on pension contributions through salary sacrifice, with amounts above that threshold taxed similarly to other employee pension contributions.”
Salary sacrifice involves sacrificing a portion of pre-tax salary for non-cash benefits like pension contributions, reducing gross salary and overall tax liability. Employers also pay lower National Insurance contributions as a result.
While there is currently no cap on pension savings through salary sacrifice, there is an annual allowance of £60,000 before tax liability applies. However, experts caution that capping these pensions 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 about the impact on employees’ take-home pay, particularly for basic rate taxpayers, labeling it a de facto tax on workers. Additionally, he highlighted the added financial burden on employers and the potential negative effect on pension savings due to the restriction.