The UK government has announced a new measure impacting pension savers, set to take effect in 2029. This measure imposes a cap of £2,000 annually on the amount that can be set aside in pensions without incurring National Insurance (NI) contributions through a method known as salary sacrifice.
Currently, salary sacrifice allows employees to agree with employers on deductions from their pay, which are redirected into pensions before NI contributions and income tax. This method helps workers benefit from a higher tax-free sum deposited into their pension. However, the new cap will necessitate NI contributions on any salary sacrifice amounts exceeding £2,000, affecting both employees and employers. Workers earning at the basic tax rate will incur NI contributions of 8%, while higher-rate taxpayers will pay 2%. Employers are responsible for a 15% NI charge.
The Office for Budget Responsibility (OBR) estimates that this new cap will generate £4.7 billion in additional NI contributions in 2029. Proponents of the cap, including Chancellor Rachel Reeves, argue it addresses inequalities in the current system, which they believe disproportionately benefits high-income earners, particularly in the financial sector.
However, concerns have been raised about the future implications of this policy. Former pensions minister Steve Webb suggested that the three-year interval before the measure takes effect could provide firms with opportunities to adjust their pay and pension offerings. Some industry experts warn that the removal of the tax break associated with salary sacrifice might lead employers to curtail planned pay increases and overall pension contributions.
About one-third of private sector employees, along with 10% of public sector workers, currently participate in salary sacrifice schemes for their pensions, with analysis indicating that roughly 7.7 million employees used it in 2024. The reforms might introduce increased administrative costs for businesses and lead to potentially lower take-home pay for employees.
Source: https://www.bbc.com/news/articles/cd9zx8z5d1no?at_medium=RSS&at_campaign=rss