National insurance could be charged on employer’s pension contributions

With only four weeks to go until the first Budget of the Labour government, a former minister for pensions has said that the best way for Rachel Reeves raise billions would be through a charge on pension contributions made by employers.

Sir Steve Webb stated that taxing employer contributions to pensions could net around PS16bn, and would be more politically attractive than other options.

Webb is a former Liberal Democrat MEP and Pensions Minister from 2010 to 2015. He now works as a financial consultant at Lane Clark & Peacock.

Analysis, published by LCP this week, examines possible changes to the pension tax relief in the Budget of 30 October. Reeves, the authors say, is likely to be interested in pension tax relief, since Labour has promised not to increase income tax, national security, VAT, and corporation tax. The Treasury estimates that this would cost around PS48.7bn per year.

Webb stated: “The chancellor is looking for relatively easy changes that can be implemented quickly and raise large amounts of money with the least amount of voter anger.

The chancellor will have been aware of the high cost associated with exempting pension contributions for employers from national insurance contributions.

Currently, wages are subject both to employee NI contributions – which the previous government reduced from 12% down to 8% – and employer NI contribution at 13.8%. If the same amount of remuneration goes into a pension fund, neither the employee nor the company is charged NI.

Due to this difference, employers often use the salary sacrifice method, where employees agree to take a paycut in exchange for an agreement whereby their employer also makes individual pension contributions to reduce the overall NI cost.

According to the government, the cost of employers not paying NI on pension contributions is estimated at around PS23.8bn.

LCP suggests three options to reduce the cost of relief. Treasury could apply the full NI rate to all employer contributions. The Treasury could introduce a lower rate of employer NI to be applied to all employer pension contributions. Or, it could eliminate salary sacrifices for pensions.

According to the authors, imposing full NI in one go on employer pension contributions would increase business costs by a large amount. This would undermine the government’s goal of growth and reduce the amount that firms are willing to spend for their employees’ pensions.

It is likely that a new rate for employer contributions will be introduced, which would start relatively low, but could generate more revenue.

The Institute for Fiscal Studies has also suggested Reeves can levy National Insurance on employer pension contributions. However, “Labour’s pledge not to raise NICs may make this difficult”.

Adam Corlett , principal economist of the Resolution Foundation, , said last month that “the chancellor’s self-imposed restrictions on not raising income taxes, VAT, national security or corporation tax do not leave her much manoeuvre if they don’t want to breach manifesto commitments.” There are several tax areas she should concentrate on.

“Long-overdue reforms of inheritance tax, capital gain tax, and pension contribution reductions would fit the bill. They could raise more than PS20bn, if necessary, and also make the tax system fair and consistent for different taxpayers.”

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