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Tax experts are warning of a hit to British retirement funds if chancellor Rachel Reeves axes the national insurance exemption on employer pension contributions in the Budget on October 30.
Labour’s general election manifesto promised not to increase taxes on “working people”, including national insurance payments.
But on Sunday business secretary Jonathan Reynolds said the pledge applied to “employees and income tax”, an answer that indicates the chancellor may be considering raising NI payments made by employers.
Now, businesses are racing to forecast how any changes could affect their costs.
What might the government do?
Currently, employers do not pay any national insurance on their pension contributions.
If Reeves forces companies to begin paying NI at 13.8 per cent — in line with other expenses and benefits they give to their employees — that would raise up to £12bn from private sector employers by the end of the decade, according to the Resolution Foundation.
This would fall to £9bn if around £3bn was used to give full NI relief on employee pension contributions.
Sir Steve Webb, former Liberal Democrat pensions minister, said the government could “raise a couple of billion” pounds by creating a new 2 per cent rate.
What impact would this have on companies?
Experts said any change would have a severe impact on business, which could hit payments into staff pension schemes and slow hiring or future pay rises.
David Lane, chief executive of pension provider TPT Retirement Solutions, estimated that an employer paying 10 per cent into its staff pension schemes “could be looking at anything between a 1-2 per cent increase in their staff payroll bill” if NI was charged at a flat rate of 13.8 per cent.
Nimesh Shah, chief executive of accountancy firm Blick Rothenberg, said levying a NI rate of 13.8 per cent on employer pension contributions would negatively affect hiring decisions and business investment.
“For most businesses, the biggest cost is their people. The cost of [adding NI to contributions] will be huge,” he said. “It would be a tax on businesses, employees and employees’ pensions.”
How might companies respond?
Businesses’ reaction will depend on what the rate is. A poll by the Association of British Insurers and the Reward and Employee Benefits Association found that 42 per cent of companies that currently pay pension contributions above the auto-enrolment minimum would lower them if NI was introduced.
A high rate, such as 13.8 per cent, might also lead companies to rethink salary sacrifice schemes where individuals receive a lower salary in exchange for higher pension contributions. This enables staff to reduce their income tax bill and employers to cut their NI bill. But a higher rate could mean the benefit to companies evaporates.
Small companies would be hit hardest. Martin McTague, national chair of the Federation of Small Businesses trade group, said adding employer NI to pension costs would be “one way of shrinking small business employment even more in 2025”, after thousands of job losses since early last year.
What other consequences could there be?
Any changes to NI contributions would come alongside employment rights reform that aims to tilt control back to workers from businesses.
“If [government] is making employment even harder, the obvious answer is to not employ people,” said Rebecca Seeley Harris, founder of ReLegal Consulting. She predicted businesses would instead hire freelance contractors through “umbrella” companies — payroll agencies that take on a contractor’s financial administration, managing their tax and pay.
But the so-called umbrella sector is unregulated and includes scam outfits that have exploited workers.
Businesses preparing to sell their defined benefit pension schemes to an insurer after higher interest rates improved their funding position could also be affected. Reducing or ending NI tax relief on pension contributions would make this process more expensive, said David Robbins, pension policy expert at consultancy Willis Towers Watson.
What would be the impact on staff?
Workers might have to rethink their pension contributions if their employers start paying in less. About half of Britons are not putting enough money aside for retirement already, said the Pensions and Lifetime Savings Association.
Joe Dabrowski, deputy director of policy at the trade group, said Reeves should think “very carefully” before changing how pensions are taxed, warning it risks further disincentivising retirement saving. The Treasury did not immediately respond to a request for comment.
A wind-down of salary sacrifice schemes could also push more people into higher tax bands, in particular hitting those who use the mechanism to avoid the cliff-edge of high marginal tax rates if they earn more than £100,000, or to prevent the loss of state childcare benefits.
Raj Mody, partner at advisory firm PwC, said: “If an employer unwound a salary sacrifice arrangement, then employees may well shoulder some extra tax as a result, so it ends up partially an employee tax after all.”
Robbins said people should expect higher payroll taxes to feed through to “some combination of slower pay growth and worse pension provision”.