Pension savers utilizing salary sacrifice schemes to build their retirement funds will soon face a limit on their contributions before triggering National Insurance payments.
Rachel Reeves announced a new annual cap of £2,000 on pension savings via salary sacrifice schemes in the recent Budget. Effective from April 2029, any contributions exceeding this threshold will be subject to National Insurance deductions.
The introduction of this cap is expected to generate £4.7 billion for the Treasury. The Chancellor emphasized that contributions over the £2,000 limit will be taxed similarly to regular employee pension contributions.
Salary sacrifice involves forgoing a portion of pre-tax income for non-cash benefits like pension contributions. This reduces the gross salary, leading to lower overall tax payments and reduced National Insurance contributions by the employer.
While there is currently no maximum limit on pension savings through salary sacrifice, there is an annual allowance of £60,000 before incurring tax implications. However, experts caution that capping these contributions could result in lower retirement savings for individuals or potential closure of pension 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, especially for basic rate taxpayers. He highlighted the potential negative effects on pension saving and the additional burden on employers due to the restrictions on salary sacrifice for pensions.