Pension savers using salary sacrifice schemes will face a new limit on their contributions before incurring National Insurance charges, according to a recent announcement by Rachel Reeves during the Budget. Starting from April 2029, a maximum annual cap of £2,000 will be placed on pension savings via salary sacrifice schemes. Any contributions exceeding this threshold will no longer be exempt from National Insurance.
The introduction of this cap is expected to generate £4.7 billion for the Treasury. The Chancellor emphasized that contributions exceeding the £2,000 limit will be taxed similarly to other employee pension contributions.
Salary sacrifice involves reducing pre-tax income for non-cash benefits like pension scheme payments. By adjusting your salary before taxes and National Insurance deductions, your gross income decreases, resulting in lower overall tax payments. Employers also pay reduced National Insurance contributions due to this arrangement.
While there is currently no specific cap on pension contributions through salary sacrifice, there exists an annual limit of £60,000 for tax-free retirement savings. Some experts caution that restricting salary sacrifice for pensions could lead to lower retirement funds for savers or even the closure of pension schemes in some workplaces.
Steve Hitchiner, Chair of the Tax Group at the Society of Pensions Professionals, expressed concerns over the impact on employees’ take-home pay, especially for basic rate taxpayers. He highlighted the potential negative effects on pension savings and the additional financial burden on employers resulting from this restriction.
