Pension savers who use salary sacrifice arrangements to contribute to their retirement savings will now face a limit on their contributions before incurring National Insurance charges.
Rachel Reeves, in her Budget announcement, has revealed a new annual cap of £2,000 on pension contributions made through salary sacrifice schemes.
Effective from April 2029, the cap will ensure that any pension contributions exceeding £2,000 annually through salary sacrifice will be subject to National Insurance deductions.
This measure is expected to generate £4.7 billion for the Treasury. The Chancellor emphasized the introduction of the £2,000 cap on salary sacrifice pension contributions to align them with other employee pension contributions in terms of taxation.
Salary sacrifice involves sacrificing a portion of pre-tax salary for non-cash benefits like pension contributions. By reducing the gross salary before tax and National Insurance calculations, individuals pay less tax overall, while employers pay reduced National Insurance contributions.
Currently, there is no restriction on the amount one can save into a pension through salary sacrifice. However, there is an annual allowance limit of £60,000 for tax-free pension contributions.
Experts caution that imposing a cap on salary sacrifice pensions may reduce retirement savings for individuals or lead some employers to discontinue their schemes.
Steve Hitchiner, Chair of the Tax Group at the Society of Pensions Professionals, expressed concerns that limiting salary sacrifice for pensions could impact the take-home pay of many employees, particularly basic rate taxpayers, and reduce overall pension savings.
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