National insurance on pension contributions ‘could raise billions’

The introduction of national insurance on employer pension contributions is the most likely way Rachel Reeves would raise billions from the pensions sector in the budget next month, according to a former minister.
Sir Steve Webb, who was in charge of pensions during the coalition government, said putting the tax on employer contributions could raise anything up to a net £16 billion per year and would be politically less difficult than other measures.
Raiding the net £49 billion that pensions tax relief costs the Exchequer each year is seen as a primary candidate for the chancellor, who is under pressure to repair the public finances without hitting working families.
Charging national insurance on employer contributions would nevertheless infuriate employers already facing large cost increases from the rise in the minimum wage and higher interest rates. It would also clash with Reeves’s pro-growth agenda and would be seen as a tax on jobs.
Webb, 59, now a partner at LCP, the pensions consultants, argued that other ways of reducing pensions tax relief would be more difficult. Reducing the tax-free lump sum that can be taken on retirement would potentially hit millions of public sector workers, he said. Bringing in a single flat rate of relief was difficult for the same reason.
Employers pay no national insurance on pension contributions as things stand. If raised to the standard rate of 13.8 per cent that they pay on normal wages above £175 a week, this would raise a gross £24 billion, Webb said.
Even adjusting for the extra cost this would impose on public sector employers like the health service and schools, the net boost to Treasury coffers would be £16 billion.
That would go a long way to filling the £22 billion hole that Labour accuses the Conservatives of hiding in the public accounts, an allegation denied by the Tories.
Even a lower national insurance rate for pension contributions of, say, 2 per cent would raise “a couple of billion”, said Webb, a Liberal Democrat who served as pensions minister between 2010 and 2015. LCP undertook the research.
The Institute for Fiscal Studies and the Resolution Foundation think tank have both proposed applying national insurance to employer contributions as a way of raising revenues for the government. The IFS said there was “a strong case for reform” because of the way tax relief largely benefits higher earners and those with more generous employers.
Webb said the approach would be attractive to Reeves because it could be introduced quickly and would have no immediate impact on employees. It could also be pitched as a way of removing an unfairness in the way some employers use so-called salary sacrifice to reduce tax further. Under the commonly used device of salary sacrifice, some employers pay staff less but agree to cover the cost of their pension contributions.
An alternative way of boosting Treasury coffers would be to make pension contributions no longer eligible for salary sacrifice, Webb said.
“The big advantage for the chancellor is that in most cases this [changes to NI] would have no immediate pay-packet effect on voters, so would have lower political saliency. It could also be implemented relatively quickly.”
Pension tax relief is viewed as a fundamental way of encouraging workers to save for their old age and avoid becoming a burden on the state. The gross cost of it is £70.6 billion, though the government recoups £22 billion from pensioners paying more income tax as a result, leaving a net bill of £48.7 billion, according to LCP calculations.
“If the government could save even a small percentage of this total cost, it could make a meaningful contribution to the Treasury’s overall tax and spending plans,” it said.