Pension savers utilizing salary sacrifice schemes to build their retirement funds will soon face a cap on their contributions before triggering National Insurance payments.
In her recent Budget announcement, Rachel Reeves revealed a new yearly limit of £2,000 on pension savings through salary sacrifice schemes. This cap, effective from April 2029, will subject any contributions exceeding the £2,000 threshold to National Insurance deductions.
The introduction of this cap is expected to generate approximately £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 sacrificing a portion of pre-tax salary for non-cash benefits like pension contributions, reducing gross salary and overall tax payments. While there is currently no cap on pension savings through salary sacrifice, there is an annual overall allowance of £60,000 before tax liability kicks in.
However, experts caution that limiting salary sacrifice pensions could lead to reduced retirement savings for individuals or even the closure of pension schemes by some employers. Steve Hitchiner of the Society of Pensions Professionals highlighted the potential impact on employees’ take-home pay, especially for basic rate taxpayers, and the adverse effect on pension saving due to these restrictions.