With just four weeks until the Labour government’s first Budget, a former pensions minister has suggested that one of the most likely ways for chancellor Rachel Reeves to raise billions is through a national insurance charge on employers’ pension contributions.
Sir Steve Webb said that taxing employer pension contributions could net around £16bn and would be politically more attractive than alternative options.
Webb, a former Liberal Democrat MP and pensions minister from 2010 to 2015, is now a partner at the financial consultancy Lane Clark & Peacock (LCP).
Analysis published this week by LCP examines potential changes to pension tax relief as part of the Budget on 30 October. The authors believe that since Labour has pledged not to raise income tax, national insurance, VAT and corporation tax, Reeves is likely to take a keen interest in pension tax relief – with a net annual cost estimated by the Treasury at around £48.7bn.
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Webb said: “The chancellor will be looking for relatively simple changes that can be introduced quickly and will raise large sums with the least voter anger.
“Changes to taxes on business may fall within that category, and the large cost of exempting employer pension contributions from national insurance contributions will not have escaped the chancellor’s attention.”
At present, wages are subject to both employee NI contributions – which the previous government cut from 12% to 8% – and employer NI contributions at 13.8%. But if that same remuneration is paid into a pension, no NI is levied on either the worker or the firm.
Because of this difference, many employers use salary sacrifice, where workers agree to a pay cut in return for a deal whereby individual pension contributions are also made by their employer to reduce the overall NI bill.
The government estimates that the cost of not charging NI on the pension contributions made by employers is around £23.8bn.
LCP suggest three options for reducing the cost of the relief. The Treasury could simply apply full NI to all employer pension contributions. It could create a new lower rate of employer NI and apply it to employer pension contributions. Or it could abolish salary sacrifice for pensions altogether.
The authors say that levying full NI on employer pension contributions in one go would be a huge increase to the cost of business. This could damage the government’s growth objective and would likely reduce the amount of money firms were willing to spend on their workers’ pensions.
They say a new rate of NI on employer contributions, starting relatively low but with the potential to generate additional revenue, is more likely.
The Institute for Fiscal Studies has also recently suggested that Reeves could levy national insurance on employer pension contributions, though “Labour’s manifesto pledge not to increase NICs might make that difficult”.
But Adam Corlett, principal economist at the Resolution Foundation, said last month: “The chancellor’s self-imposed constraints on not raising income tax, VAT, national insurance or corporation tax don’t leave her much room for manoeuvre if she doesn’t want to break manifesto commitments. But there are still several areas of tax she should focus on.
“Long overdue reforms to inheritance tax, capital gains tax and pension contribution reliefs would fit the bill and could raise over £20bn if needed, while also making the tax system fairer and more consistent between different taxpayers.”
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