Pension savers utilizing salary sacrifice schemes to bolster their retirement savings will soon face a cap on their contributions before incurring National Insurance charges. Announced by Rachel Reeves in the Budget, a new annual limit of £2,000 will be imposed on pension contributions through salary sacrifice schemes starting April 2029. Any amount exceeding this threshold will be subject to National Insurance.
This measure is projected to generate £4.7 billion for the Treasury. The Chancellor highlighted, “I am implementing a £2,000 ceiling on pension contributions made through salary sacrifice, with contributions surpassing this amount being taxed similarly to other employee pension contributions.”
Salary sacrifice involves sacrificing a portion of your pre-tax salary for non-cash benefits like pension payments. By reducing your gross salary before tax and National Insurance deductions, you pay less in overall taxes, while your employer pays reduced National Insurance contributions.
While there is currently no specific limit on pension savings through salary sacrifice, there exists an overall annual cap of £60,000 for tax-free pension contributions. Experts caution that capping pension contributions through salary sacrifice may lead to reduced retirement savings for individuals or even the 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 numerous employees, particularly basic rate taxpayers, and essentially acts as a tax on the workforce. It also adds to employers’ costs and, significantly, diminishes pension savings.”
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