Pension contributors utilizing salary sacrifice schemes will face a limit on their pre-National Insurance contributions toward their retirement funds. Rachel Reeves announced a new annual cap of £2,000 on pension savings through these schemes, effective from April 2029. Contributions exceeding this threshold will be subject to National Insurance.
The implementation of this cap is expected to generate £4.7 billion for the Treasury. The Chancellor clarified that contributions over the £2,000 cap will be taxed similarly to other employee pension contributions.
Salary sacrifice involves forgoing a portion of pre-tax salary for non-cash benefits like pension payments. This arrangement reduces gross salary, leading to lower overall tax payments and decreased National Insurance contributions for both the employee and the employer.
While there is currently no specific limit on pension savings through salary sacrifice, there exists an annual allowance of £60,000 for tax-free retirement contributions. Experts caution that capping such pensions could result in reduced savings upon retirement or potential closure of pension schemes by employers.
Steve Hitchiner, Chair of the Tax Group at the Society of Pensions Professionals, expressed concern over the impact of restricting salary sacrifice on employees’ take-home pay and pension saving levels. He emphasized the potential negative effects on basic rate taxpayers and the overall reduction in pension savings due to this restriction.