The chancellor is reportedly planning to cap the amount of salary that can be put into a pension free of employee and employer national insurance at £2,000, to raise £2bn for the government coffers, in a move the Society of Pension Professionals has said would tax the very group the government promised to protect.  

The Times reported on Friday that the Treasury intends to implement the least extreme of three hypothetical scenarios HM Revenue and Customs had tested with employers – removing NICs relief above a threshold of £2,000 of pension contributions. Contributions would still be free from income tax.   

Employees currently pay 8% NICs on salary up to £50,268; above that, NICs are levied at 2%, making national insurance relief less valuable to higher earners than lower earners.   

On the employer side, NICs were ratcheted up from April this year, with a much lower threshold and higher headline contribution of 15% announced at the last Budget. While increasing employers’ costs, the change also had the effect of making salary sacrifice more attractive given the higher saving to be made.   

A different approach to raising national insurance on pensions would be to levy it on pension income, but if the press reports are true, the Treasury may have opted to put the burden on working people instead. This would be breaking a manifesto promise that “Labour will not increase taxes on working people, which is why we will not increase national insurance, the basic, higher, or additional rates of income tax, or VAT.”  

However, a highly unusual pre-Budget speech the chancellor gave last week is widely interpreted as laying the ground for tax rises as the government is looking to finance its spending plans, along with facing high debt interest and a downgrade in the UK’s economic outlook.  

Pension contributions are currently entirely relieved of NICs, both on ‘the way in’, and on ‘the way out’ since pensioners do not pay any national insurance, noted tax lawyer Dan Neidle, speaking on a recent podcast by thinktank the Institute for Fiscal Studies.  

“We should have relief on one side, tax on the other side. Here we have relief on one side and no tax on the other side,” Neidle said. “So I say, tax the pensioners.” 

NI contribution years are counted to establish eligibility for the state pension, which may be a reason why those in receipt of the state pension no longer pay it. 

“Pensions is the biggest form of remuneration that gets no national insurance contributions at either end,” agreed IFS director Helen Miller. “You might want to think differently about the employer bit of it, the employee bit of it, and put some up front and some at the end.”  

IFS senior economist Stuart Adam said: “You could go about dealing with that either by looking at tax on pension income or looking at tax on employers’ pension contributions.”

It seems that the Treasury has decided to stick with the ‘way in’ end – having felt the power of the grey vote at the last local elections following the winter fuel allowance proposals.   

The pensions industry is deeply displeased about this further tinkering with the tax regime of what is meant to be a long-term savings ‘contract’ between savers and government, and is accusing the government of breaking its election promise to workers.   

“If salary sacrifice for pensions were to be abolished or reduced it is difficult to see how this could be characterised as anything other than a tax on working people given it would affect the take home pay of millions of employees,” said Steve Hitchiner, who chairs the Society of Pension Professionals’ tax group. 

Hitchiner added: “It would also represent another sizeable cost to employers, despite the chancellor’s public commitment against this, and would undermine the critical role that employers play in supporting and promoting good quality pension saving vehicles.”    

The SPP has been lobbying against changing salary sacrifice, publishing a paper entitled, ‘A sacrifice too far?’ 

Other industry groups have accused the government of undermining trust in pensions by tweaking the rules at successive Budgets.    

“Pensions policy must not become a testing ground for short-term revenue raising through stealth taxes. Such measures will increase the costs to employers of providing pensions for their workers and risk undoing years of progress on retirement outcomes, all at a time where we already know millions of workers are not saving enough for their retirement,” said Yvonne Braun, director of long-term savings at the Association of British Insurers.    

“Constant speculation about and tinkering with pension policy damages confidence in the entire pension system, fuels confusion and leads to real financial harm where savers act on uncertainty,” she added.    

Previous research by the ABI and the Reward and Employee Benefits Association suggests 42% of employers that pay staff more than the minimum pension would consider reducing their contributions if national insurance was introduced on employer pension payments, while 40% would try to keep to their current pension contribution levels despite the higher cost.    

Zoe Alexander, executive director of policy and advocacy at Pensions UK, said pensions are a long-term savings product and trust in the system is critical. 

“Regular changes to pension rules in the budget actively erode that trust,” she said. 

Limiting salary sacrifice will hit those employers trying to do the right thing by their employees by contributing more than the minimum, she added, leading to lower savings overall.

Any reduction to NI savings that can be made by staff sacrificing pension contributions is likely to be particularly unpopular, said Hannah English, head of DC corporate consulting at consultancy Hymans Robertson.

"By capping employee NI savings from salary sacrifice, employers will be less incentivised to encourage employee pension saving," she argued. "Our recent research has shown that many employers would consider design changes to their pension offerings as a way to offset further costs; this risks overall lower pension contributions which would further exacerbate the UK’s existing retirement adequacy crisis."

Salary sacrifice could become less attractive, but the impact of any change could potentially be softened by a rumoured ‘swap’ of 2% from national insurance to income tax the Treasury is also reportedly considering – meaning the tax relief available on pensions from income tax would be increased.

However, English said changes to the taxation system, even if they have limited or no effect on take-home pay, erode trust in what the future system will look like. Such a swap would also hit pensioners, the most powerful voter demographic.

 
An HM Treasury spokesperson said: “We do not comment on speculation around changes to tax outside of fiscal events.”