As speculation mounts that the chancellor could levy national insurance on employer pension contributions, there are warnings employers could scale back their benefit offerings and pay rises in response, with negative effects on today’s workers.  

Chancellor Rachel Reeves should be wary of levying national insurance on employer pension contributions in her search to plug a ‘black hole’ in the country’s finances, consultancy Hymans Robertson has warned.  

The cost to employers of doing so would quickly add up, depending on their number of employees and contribution level, with Hymans calling it “a substantial hit to their bottom line and ability for growth”.  

Employer national insurance rates are currently 13.8% depending on wage and category, but pension contributions are exempt.  

 

Hymans has calculated that levying NICs on a 5% employer contribution for an employee earning £32,000 would cost the employer an extra £442 a year. Even a more modest change to a 6% rate rather than the full 13.8% would still add a bill of £192 a year for the employer of that same employee, the consultancy added, warning the extra tax burden would result in lower pay rises and pension contributions for employees.  

  

Head of DC corporate consulting at Hymans, Hannah English, said the implications of any cuts to national insurance relief would be “vast” for employers. 

  

“Our concern is the impact this may have, where the current national insurance saving is used to top up pension contributions. Without this saving the top-up is under threat. Abolishing such a saving would impact future pension pots at a time when pension savings, pensioner poverty and future-proofing is at a record low.” 

 

Hymans has calculated the impact of different levels of NICs that could be raised on pension contributions:   

   

On Thursday, former pensions minister and LCP partner Steve Webb said he thinks the government might start levying a small percentage of NICs on employer pension contributions, with the intention of avoiding big behavioural shifts, but would then put this up a notch at a future Budget. 

 

 

Investment platform AJ Bell said on Friday it has written to the chancellor urging the government to commit to stability with a ‘pension tax lock’ to increase confidence in long-term saving. 

“The chancellor should resist a short-sighted tax grab from the nation’s long-term savings system. Instead, a public commitment to a pensions tax lock, promising not to tinker with the fundamentals of the pension tax system in this parliament, would deliver confidence for savers and signal that this government is serious about supporting long-term prosperity,” said chief executive Michael Summersgill.  

Workers who take responsibility for providing for themselves once they stop working should not be subject to continuous speculation about how their money will be taxed, he warned, as there have also been rumours about changes to the tax-free lump sum and up-front income tax relief, although the Treasury has reportedly dropped the latter because of the impact on public sector workers.
 

 

Summersgill said in recent months speculation around the future tax treatment of pension contributions and the lump sum “has been allowed to fester”, which “risks undermining confidence in the UK’s most critical long-term savings vehicle”. 

How would NICs on employer contributions affect contribution levels and pay rises?