NICs cap could hurt lower earners, Webb says
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Lower earners are not necessarily protected from the impact of a cap on national insurance relief in pensions salary sacrifice like the government claims, former pensions minister Sir Steve Webb has said, as the Office for Budget Responsibility warns that employers might contribute less to staff pensions or pay lower wages.
The cap announced by chancellor Rachel Reeves last year means from 2029, pension contributions over £2,000 a year that are made via salary sacrifice will incur national insurance, both for employers and employees. NICs is currently levied at 8% for basic and 2% for higher and additional rate taxpayers, while employer NICs was raised to 15% from April 2025.
HM Revenue and Customs has previously said that 44% of 7.7m employees that use salary sacrifice to make pension contributions sacrifice more than £2,000, adding that “around 4.3m people are fully protected by the £2,000 threshold”. The Treasury said last autumn that "the cap shields 74% of basic rate taxpayers using salary sacrifice”.
The cap announced by chancellor Rachel Reeves last year means from 2029, pension contributions over £2,000 a year that are made via salary sacrifice will incur national insurance, both for employers and employees. NICs is currently levied at 8% for basic and 2% for higher and additional rate taxpayers, while employer NICs was raised to 15% from April 2025.
HM Revenue and Customs has previously said that 44% of 7.7m employees that use salary sacrifice to make pension contributions sacrifice more than £2,000, adding that “around 4.3m people are fully protected by the £2,000 threshold”. The Treasury said last autumn that "the cap shields 74% of basic rate taxpayers using salary sacrifice”.
However, this claim is being put into question by the latest OBR publication on the measure on Thursday, which cites “a high level of uncertainty” about the behavioural response which, for employers, could include paying lower pension contributions across their workforce. LCP partner Sir Steve Webb has highlighted that because of this, lower earners could lose out.
“Far from ordinary workers being ‘protected’ from the changes, we could see millions of people on modest incomes losing out as well, further undermining their incentive to save in a pension. We urgently need the government to be clear about the true scale of the losses from this policy and not continue to suggest that ordinary workers will not be affected,” he said.
On LinkedIn, he said the government’s claim that lower earners will be protected amounted to “Treasury ‘spin’”.
Damon Hopkins, head of DC workplace savings at consultancy Broadstone, also said the options employers have available to them will not be without consequence: “Like the increase to employer national insurance, the increased cost to employers from this measure will likely fall to workers in some form, such as less generous workplace pension contributions, lower future pay rises or [fewer] jobs.”
The Treasury is aware of this, noting last autumn that "the extent to which employers and employees will adapt their behaviour in response to the measure is particularly uncertain".
Damon Hopkins, head of DC workplace savings at consultancy Broadstone, also said the options employers have available to them will not be without consequence: “Like the increase to employer national insurance, the increased cost to employers from this measure will likely fall to workers in some form, such as less generous workplace pension contributions, lower future pay rises or [fewer] jobs.”
The Treasury is aware of this, noting last autumn that "the extent to which employers and employees will adapt their behaviour in response to the measure is particularly uncertain".
However, it insists that lower earners will be shielded from its policy. A Treasury spokesperson said: “This isn’t new information – the costing note published at Budget included the behavioural impacts of the measure. Our reforms protect 95% of workers earning under £30,000 who use salary sacrifice, while tackling costs that were set to treble to £8bn as high‑earners piled in bonuses tax‑free.”
There is a wide range of possible behavioural change prompted by the policy. As well as paying lower wages or lowering employer contributions – or posting lower profits – the OBR said employers could seek to side-step the extra NICs by moving to ordinary contributions, paid outside of salary sacrifice, which remain NICs exempt. They could also switch to ‘relief at source’ schemes, where pension contributions are made after tax and the pension provider applies basic rate tax relief, with savers having to claim any higher rate relief from HRMC.
There is a wide range of possible behavioural change prompted by the policy. As well as paying lower wages or lowering employer contributions – or posting lower profits – the OBR said employers could seek to side-step the extra NICs by moving to ordinary contributions, paid outside of salary sacrifice, which remain NICs exempt. They could also switch to ‘relief at source’ schemes, where pension contributions are made after tax and the pension provider applies basic rate tax relief, with savers having to claim any higher rate relief from HRMC.
Employees in DC schemes, meanwhile, might reduce their contribution levels to receive an increase in take-home pay. The OBR estimates that 80% of savers in scope will respond in this way, with lower-earning employees reducing them by as much as 2.75% and higher earners by 1.8%.
As these behavioural effects are highly uncertain, so is the costing. While the OBR predicts a temporary spike in revenue of £4.7bn in 2029-30, it expects this to reduce to £3.2bn a year in the longer term because of how savers and companies will respond.
As these behavioural effects are highly uncertain, so is the costing. While the OBR predicts a temporary spike in revenue of £4.7bn in 2029-30, it expects this to reduce to £3.2bn a year in the longer term because of how savers and companies will respond.
