National insurance for pension contributions could raise billions

According to a former Minister, the introduction of national insurance for employer pension contributions would be the most likely way Rachel Reeves would raise millions from the pensions industry in the budget next week .

Sir Steve Webb who was responsible for pensions in the coalition government said that a tax on employer contributions would raise up to 16 billion pounds sterling per year. This measure is also less controversial than others.

The chancellor is under intense pressure to fix the public finances, without affecting working families. Employers would be furious if they were to pay national insurance through their employer contributions. They are already paying higher rates of interest and minimum wages, which have led to a significant increase in costs. This would be in conflict with Reeves’s pro-growth agenda, and seen as a tax against jobs.

Webb, who is now a partner with LCP, a pensions consultant, said that it would be difficult to reduce pension tax relief in other ways. He said that reducing the tax-free lump-sum amount available to retirees could affect millions of workers in the public sector. The same problem made it difficult to introduce a flat-rate of relief.

Currently, employers do not pay national insurance for pension contributions. Webb stated that if the rate was raised to 13.8 percent, which is what they pay for normal wages over £175 per week, it would generate a gross of £24 billion.

Even after adjusting for any additional costs that this could impose on employers in the public sector, such as the schools and health services, the Treasury would still benefit by £16 billion. This would be a big step towards filling in the £22 billion gap that Labour claims the Conservatives are hiding in public accounts. The Tories deny this allegation.

Webb, a Liberal Democrat and former Pensions Minister between 2010-2015, said that even a 2 percent reduction in the national insurance rate would generate “a few billion” of savings. The research was conducted by LCP.

Rachel Reeves is delivering her first budget to Parliament on 30 October

Both the Institute for Fiscal Studies (IFS) and Resolution Foundation, a think tank, have proposed that employer contributions be incorporated into national insurance as a means of increasing government revenues. IFS stated that there is “a strong argument for reform” due to the fact that tax relief benefits largely higher earners, and those who have more generous employers.

Webb said that Reeves would find the approach attractive because it would be implemented quickly and have no immediate effect on employees. This could be marketed as a solution to the unfairness of some employers who use so-called “salary sacrifice” in order to further reduce their tax. Salary sacrifice is a common method of reducing tax. Some employers will pay their staff less, but they agree to cover the cost for their pension contributions.

Webb suggested that a way to boost Treasury coffers is by removing pension contributions from the salary sacrifice program. The biggest advantage for the chancellor would be that this [change to NI] in most cases would not have an immediate pay-packet impact on voters and would therefore have a lower political saliency. It could be implemented fairly quickly.”

The government’s pension tax relief program is seen as an important way to encourage workers to save and not become a burden on society. According to LCP calculations, the gross cost is £70.6bn, but the government recovers £22bn from pensioners who pay more income tax. This leaves a net bill for £48.7bn. It said that “if the government could even save a small portion of the total cost, they could make a significant contribution to Treasury’s overall spending and tax plans.”