Pension savers utilizing salary sacrifice arrangements to bolster their retirement funds will face a limit on their contributions before incurring National Insurance charges.
In her Budget announcement, Rachel Reeves disclosed a new annual cap of £2,000 on pension savings through salary sacrifice schemes, effective starting April 2029. Contributions exceeding this limit will be subject to National Insurance deductions.
The implementation of this cap is anticipated to generate £4.7 billion for the Treasury. The Chancellor emphasized that contributions above the £2,000 threshold into a pension via salary sacrifice will be taxed akin to regular employee pension contributions.
Salary sacrifice involves relinquishing a portion of pre-tax income for non-monetary benefits like pension contributions. By reducing the gross salary before tax and National Insurance contributions, individuals can lower their tax liability. Employers also benefit from reduced National Insurance payments.
Currently, there is no ceiling on pension savings through salary sacrifice, although there exists an annual allowance of £60,000 for tax-free contributions into retirement accounts.
Experts caution that restricting salary sacrifice for pensions could lead to diminished retirement funds for savers or potential closure of pension schemes by employers.
Steve Hitchiner, Chair of the Tax Group at the Society of Pensions Professionals, expressed concerns over the impact on employees’ take-home pay, particularly affecting basic rate taxpayers. He highlighted the potential negative effects on pension savings resulting from the limitation on salary sacrifice.
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