Pension savers using salary sacrifice schemes will soon face a cap on their contributions before incurring National Insurance charges. Under the new measure confirmed by Rachel Reeves in the Budget, a yearly limit of £2,000 will be imposed on pension savings through these schemes starting April 2029.
This cap aims to generate an estimated £4.7 billion for the Treasury. The Chancellor emphasized that contributions exceeding the £2,000 threshold will be subject to taxation, aligning them with regular employee pension contributions.
Salary sacrifice involves sacrificing a portion of pre-tax income for non-cash benefits like pension contributions. This arrangement reduces gross salary, resulting in lower tax payments and decreased National Insurance contributions for both the employee and the employer.
While there is currently no ceiling on pension savings through salary sacrifice, there exists an annual allowance of £60,000 for tax-free pension contributions. However, experts caution that limiting salary sacrifice pensions could reduce retirees’ savings or lead some companies to discontinue their schemes.
Steve Hitchiner of the Society of Pensions Professionals expressed concerns, stating that restricting salary sacrifice could impact the take-home pay of many employees, particularly basic rate taxpayers. He emphasized the potential negative effects on pension savings and the added financial burden on employers.
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