Pension savers who use salary sacrifice schemes to save for retirement will face a limit on their contributions before incurring National Insurance charges. Rachel Reeves announced a new annual cap of £2,000 on pension savings through salary sacrifice schemes in the latest Budget. The cap, effective from April 2029, means that any contributions exceeding £2,000 annually will be subject to National Insurance deductions.
The introduction of this cap is projected to generate £4.7 billion for the Treasury. The Chancellor emphasized that contributions above the £2,000 limit will be treated similarly to other employee pension contributions. Salary sacrifice involves forgoing a part of your pre-tax salary for non-cash benefits like pension contributions. By reducing your gross salary before tax and National Insurance are deducted, you can lower your overall tax liability. Employers also pay reduced National Insurance contributions as a result.
While there is currently no specific limit on pension savings through salary sacrifice, there exists an overall annual allowance of £60,000 for tax-free contributions to retirement accounts. Experts caution that restricting salary sacrifice pensions could lead to lower retirement savings for individuals or even the closure of some pension schemes in workplaces.
Steve Hitchiner, Chair of the Tax Group at the Society of Pensions Professionals, expressed concerns about the impact of capping salary sacrifice on employees’ take-home pay and pension savings. He highlighted that the restriction could negatively affect pension contributions and create additional costs for employers.
