In a significant move for retirement planning, Chancellor Rachel Reeves will use her upcoming Budget to confirm a major change to pension salary sacrifice schemes.
What is Changing with Pension Salary Sacrifice?
According to documents published by the Office for Budget Responsibility (OBR), a new annual cap of £2,000 will be introduced on the amount of money you can save into your pension through salary sacrifice arrangements.
This change, scheduled to take effect from April 2029, means that pension contributions made via salary sacrifice that exceed the £2,000 yearly threshold will no longer be exempt from National Insurance contributions.
How Does Salary Sacrifice Work?
Salary sacrifice is a popular arrangement where an employee agrees to give up a portion of their pre-tax salary in exchange for a non-cash benefit, such as increased payments into their company pension scheme.
Because this exchange happens before tax and National Insurance Contributions (NICs) are calculated, it lowers your gross salary, resulting in lower overall tax payments. Employers also benefit by paying less National Insurance on the sacrificed amount.
Currently, there is no specific cap on how much you can save into your pension through salary sacrifice, although there is an overall annual allowance of £60,000 for total pension contributions before tax charges apply.
Potential Consequences for Savers
Financial experts have raised concerns that capping salary sacrifice pensions could have negative consequences for retirement savers.
They warn that this change runs the risk of individuals having less money in their pension pots when they retire. There are also fears that some employers might decide to close their salary sacrifice schemes altogether if the tax advantage is significantly reduced.
This policy shift represents one of the most substantial changes to pension taxation in recent years and could impact the retirement plans of thousands of workers across the UK.
