Pension savers who participate in salary sacrifice schemes for their retirement savings will now face a limit on their contributions before incurring National Insurance charges.
Rachel Reeves, in her Budget announcement, confirmed a new annual cap of £2,000 on pension savings through salary sacrifice schemes starting from April 2029. Contributions exceeding this threshold will no longer be exempt from National Insurance.
This cap is projected to generate £4.7 billion for the Treasury. The Chancellor stated, “I am implementing a £2,000 cap on salary sacrifice contributions to pensions, with amounts above this being subject to taxation similar to regular employee pension contributions.”
Salary sacrifice involves redirecting a portion of pre-tax income for non-cash benefits like pension contributions. By lowering taxable income before calculating taxes and National Insurance, individuals reduce their tax liability. Employers also pay less National Insurance as a result.
Currently, there is no specific limit on pension savings via salary sacrifice, although an overall annual allowance of £60,000 applies before tax obligations kick in.
Experts caution that restricting salary sacrifice pensions could result in reduced retirement savings or even closure of such schemes in some workplaces.
Steve Hitchiner, Chair of the Tax Group at the Society of Pensions Professionals, expressed concerns, stating, “Limiting salary sacrifice for pensions will impact the take-home pay of many employees, particularly basic rate taxpayers, and can be seen as a tax on the working population. It may also increase costs for employers and diminish pension contributions.”
A Treasury spokesperson reassured, “We anticipate minimal disruption with regard to employers ceasing salary sacrifice offerings. Our reforms safeguard 95% of workers earning below £30,000 who use salary sacrifice, aligning contributions above £2,000 with other pension savings, affecting only those making exceptionally large contributions.”
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