A warning has been issued to households over a £2,000 limit introduced on payments into your pension.
Households have been warned about the cap on pensions (Image: Getty)
UK households have been issued a ‘don’t stop’ warning over a pension change which will cap salary sacrifice at £2,000 a year following the Budget – and told how to beat it.
Rachel Reeves announced in the Budget last month that salary sacrifice will be limited to just £2,000 a year from April 2029.
The scheme allows workers to give up salary and place it into their workplace’s private pension scheme instead. This means that instead of paying income tax and National Insurance on the earnings, you don’t owe any tax on the money and instead put it away for your future. The only downside is that the money is deducted from your net pay and locked away until you turn 57.
Investing and financial specialists at AJ Bell have warned people that ‘whatever you do, don’t stop your pension contributions’ following the news that salary sacrifice will be capped at £2,000 in future – because it only applies to National Insurance, and you can still get the income tax savings.
Laura Suter, Director of Personal Finance at AJ Bell warned: “The National Insurance perks of using salary sacrifice for pensions will be capped at £2,000 per year from April 2029. But whatever you do, don’t stop your pension contributions.”
She went on to explain: “Despite the National Insurance savings being limited, what you pay in will still be exempt from income tax and workers can still enjoy pension tax relief up to their marginal rate of income tax. “What’s more, making pension contributions to schemes like SIPPs will still reduce your ‘adjusted net income’.
“This is important as it can pull you out of higher rate tax brackets or one of the many punishing tax traps while also boosting your retirement savings.”
Around 3.3 million pension savers are on course to be hit by the salary sacrifice changes announced in the Budget, HM Revenue and Customs (HMRC) figures show.
Guidance published online by HMRC about the changes said an estimated 7.7 million employees currently use salary sacrifice to make pension contributions.
Of these, 3.3 million sacrifice more than £2,000 of salary or bonuses.
Changes announced in the Budget will mean salary-sacrificed pension contributions above an annual £2,000 threshold will no longer be exempt from national insurance (NI) from April 2029.
The announcement in the Budget has been criticised by pensions industry bodies, who have argued many people are already thought to be heading for a tough time financially in later life.
Yvonne Braun, director of policy, long-term savings, health and protection at the Association of British Insurers (ABI), previously said “the wider work required to rebuild people’s trust in the stability of pensions will take years”.
