Pension savers who use salary sacrifice schemes to contribute to their retirement funds will now face a cap on their contributions before incurring National Insurance charges.
During the Budget announcement, Rachel Reeves confirmed a new annual limit of £2,000 for pension savings through salary sacrifice schemes, starting from April 2029. Contributions exceeding this threshold 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 agreeing to reduce pre-tax salary for non-cash benefits like pension contributions. By lowering the gross salary before tax and National Insurance calculations, individuals reduce their overall tax liability, and employers pay less National Insurance.
Currently, there is no specific cap on pension savings through salary sacrifice, although an annual allowance of £60,000 limits tax-free contributions to retirement funds.
Experts caution that limiting salary sacrifice 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 concern that restricting salary sacrifice for pensions could impact the take-home pay of many employees, particularly basic rate taxpayers, while also increasing costs for employers and potentially reducing overall pension savings.