Pension savers participating in salary sacrifice programs for their retirement savings will now have a limit on their contributions before incurring National Insurance charges.

In the recent Budget announcement, Rachel Reeves revealed a new annual cap of £2,000 for pension savings made through salary sacrifice schemes, effective from April 2029. Contributions exceeding this threshold will be subject to National Insurance.

The implementation of this cap is projected to generate £4.7 billion for the Treasury. The Chancellor emphasized that contributions above the £2,000 cap will be taxed similar to regular employee pension contributions.

Salary sacrifice involves forgoing a portion of pre-tax income for non-cash benefits like pension contributions. By reducing gross salary before tax and National Insurance deductions, individuals pay less tax overall, and employers pay reduced National Insurance contributions.

While there is currently no cap on pension savings through salary sacrifice, there is an annual allowance limit of £60,000 before incurring tax. However, experts caution that imposing a cap on salary sacrifice pensions could lead to lower retirement savings for individuals or potential closure of such schemes by employers.

Steve Hitchiner, Chair of the Tax Group at the Society of Pensions Professionals, expressed concerns about the impact on employees’ take-home pay and pension savings due to the restriction on salary sacrifice contributions.

The Treasury assured that the reforms aim to safeguard the majority of workers with salaries under £30,000 who utilize salary sacrifice, aligning contributions above £2,000 with standard pension contributions. The changes are primarily targeted at those making substantial pension contributions.