Pension participants utilizing salary sacrifice arrangements will soon face a limit on their contributions before incurring National Insurance charges. Rachel Reeves announced a new £2,000 annual cap on pension savings through these schemes, effective from April 2029. Contributions exceeding this threshold will be subject to National Insurance deductions.
The implementation of this cap is expected to generate £4.7 billion for the Treasury. The Chancellor stated that contributions above the £2,000 cap will be taxed similarly to regular employee pension contributions.
Salary sacrifice involves reducing pre-tax salary for non-cash benefits like pension contributions, resulting in lower overall tax payments. While there is currently no specific cap on pension savings through salary sacrifice, there is an annual allowance limit of £60,000 before tax obligations kick in.
Experts caution that capping pension contributions through salary sacrifice could lead to reduced retirement savings for individuals or even prompt some employers to discontinue such schemes. Steve Hitchiner from the Society of Pensions Professionals highlighted the potential impact on employee take-home pay and employer costs, emphasizing the negative effect on pension savings.