Pension savers utilizing salary sacrifice schemes to build their retirement funds will face a new limit on their contributions before incurring National Insurance charges.
During the recent Budget announcement, Rachel Reeves revealed a £2,000 annual cap on pension savings through salary sacrifice schemes, effective from April 2029. Contributions exceeding this threshold will no longer be exempt from National Insurance.
The government estimates that implementing this cap will generate £4.7 billion for the Treasury. Chancellor’s statement noted, “I am introducing a £2,000 cap on salary sacrifice into a pension, with contributions above that amount taxed similarly to other employee pension contributions.”
Salary sacrifice involves sacrificing a part of your pre-tax salary for non-cash benefits like pension contributions. By reducing your gross salary before tax and National Insurance calculations, you pay less tax overall, and your employer pays less National Insurance.
Presently, there is no specific cap on pension savings through salary sacrifice, although an annual allowance of £60,000 exists before tax becomes applicable. However, experts caution that capping salary sacrifice pensions could result in reduced retirement savings for individuals or even lead some companies to close their schemes.
Steve Hitchiner, Chair of the Tax Group at the Society of Pensions Professionals, expressed concerns, stating, “Restricting salary sacrifice for pensions will impact the take-home pay of many employees, especially those on basic rates. It effectively acts as a tax on working individuals and may reduce overall pension savings.”
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