Pension savers utilizing salary sacrifice schemes to boost their retirement funds will face a new restriction on the amount they can contribute before incurring National Insurance charges.
In her Budget announcement, Rachel Reeves revealed a £2,000 annual limit on pension savings through salary sacrifice schemes starting from April 2029. Contributions exceeding this threshold will no longer be exempt from National Insurance.
The introduction of this cap is projected to generate £4.7 billion for the Treasury. The Chancellor emphasized that contributions above the £2,000 cap will be taxed similarly to other employee pension contributions.
Salary sacrifice involves agreeing to forego a portion of pre-tax salary for non-cash benefits like pension contributions. By reducing the taxable income before calculating National Insurance, individuals pay less tax overall, while employers also contribute less to National Insurance.
While there is currently no specific cap on pension savings through salary sacrifice, there is an annual allowance limit of £60,000 before tax applies. Experts caution that limiting salary sacrifice pensions could result in reduced retirement savings for individuals or potential closure of pension schemes in some workplaces.
Steve Hitchiner from the Society of Pensions Professionals expressed concerns about the impact on employee take-home pay, particularly for basic rate taxpayers. He noted that restricting salary sacrifice could hinder pension savings and pose additional costs for employers.