Pension savers participating in salary sacrifice schemes for retirement funds will soon face a limit on their contributions before incurring National Insurance charges. Rachel Reeves announced a new £2,000 annual cap on pension savings through such schemes in the latest Budget.
Effective from April 2029, any pension contributions exceeding the £2,000 yearly threshold via salary sacrifice will no longer be exempt from National Insurance deductions. This measure is projected to generate £4.7 billion for the Treasury, with the Chancellor stressing the equal taxation treatment of contributions exceeding the cap.
Salary sacrifice involves forgoing a portion of pre-tax income for non-monetary benefits like pension contributions. This strategy reduces taxable income, resulting in lower overall tax payments and decreased National Insurance contributions for both employees and employers.
Although there is currently no specific cap on pension contributions via salary sacrifice, a yearly limit of £60,000 exists for tax-free retirement savings. Concerns have been raised by experts about the potential negative impact of capping pension schemes, including reduced retirement savings for individuals and potential closure of workplace programs.
Steve Hitchiner from the Society of Pensions Professionals warned about the implications of restricting salary sacrifice, highlighting the potential financial strain on employees, especially basic rate taxpayers, and the adverse effects on pension savings.