Pension savers participating in salary sacrifice schemes will soon face a new limit on their contributions before incurring National Insurance charges. The latest budget announcement by Rachel Reeves confirms a yearly cap of £2,000 on pension savings through such schemes starting from April 2029. Contributions exceeding this cap will no longer be exempt from National Insurance.

This change is estimated to generate £4.7 billion for the Treasury. The Chancellor highlighted that contributions exceeding the £2,000 cap will be taxed similarly to other employee pension contributions.

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

While there is currently no specific cap on pension savings through salary sacrifice, there is an annual overall allowance of £60,000 before tax applies. Experts caution that capping these pensions could reduce retirement savings for individuals and potentially lead some employers to discontinue their schemes.

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

The Treasury reassured that the reforms aim to protect the majority of workers earning under £30,000 who use salary sacrifice. Only those making substantial pension contributions will be affected by the cap above £2,000.