Pension savers utilizing salary sacrifice arrangements for their retirement savings will face a new limit on their contributions before incurring National Insurance charges. Rachel Reeves, announcing in the Budget, confirmed a yearly cap of £2,000 on pension savings through salary sacrifice schemes. Effective from April 2029, any pension 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 pension contributions through salary sacrifice, with amounts above this threshold taxed similarly to regular employee pension contributions.”
Salary sacrifice involves exchanging a portion of pre-tax salary for non-cash benefits like pension contributions. By reducing gross income before tax and National Insurance deductions, individuals pay less tax overall, and employers pay lower National Insurance contributions. Currently, there is no specific limit on pension savings through salary sacrifice, although an annual allowance of £60,000 applies before tax obligations kick in.
Experts caution that restricting salary sacrifice pensions could lead to reduced retirement savings for individuals or even closure of pension schemes by some employers. Steve Hitchiner, Chair of the Tax Group at the Society of Pensions Professionals, highlighted the potential impact on employee take-home pay and overall pension savings due to these restrictions.
The Treasury assures that most workers earning under £30,000 using salary sacrifice will be safeguarded by the new regulations, aligning salary sacrifice contributions over £2,000 with standard pension contributions. Only those making substantial pension contributions will be affected by this change, according to a Treasury spokesperson.