Pension savers using salary sacrifice schemes will soon face a cap on their contributions that are exempt from National Insurance payments. The new £2,000 yearly limit, announced by Rachel Reeves in the Budget, will take effect from April 2029. Any pension contributions exceeding this threshold will be subject to National Insurance.
The introduction of this cap is projected to generate £4.7 billion for the Treasury. The Chancellor explained that contributions above the £2,000 cap will be taxed similarly to other employee pension contributions.
Salary sacrifice involves allocating a part of pre-tax income for non-cash benefits like pension contributions. This arrangement reduces gross salary, resulting in lower overall tax payments and reduced National Insurance contributions for both the employee and employer.
Currently, there is no specific limit on pension savings through salary sacrifice, although an annual allowance of £60,000 exists before tax implications. Experts caution that capping such pension contributions could lead to reduced retirement savings for individuals or even closure of pension schemes by some employers.
Steve Hitchiner, Chair of the Tax Group at the Society of Pensions Professionals, expressed concerns that limiting salary sacrifice for pensions could impact the take-home pay of many employees, particularly basic rate taxpayers. He emphasized the potential negative effects on pension savings and the additional financial burden on employers.
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