Chancellor warned against National Insurance threat to pensions (2024)

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Four in ten employers are threatening to cut their contributions to worker pension pots if the Chancellor changes the rules covering the costs.

The Chancellor is rumoured to be looking at changing the rules that allow both employers and workers not to pay National Insurance on payments diverted from salaries into workplace pension schemes.

Finance industry experts suggest making employers pay NI on these contributions could boost Treasury income by a net figure of as much as £16 billion a year.

However, new research suggests that many employers would seek to offset this bill by cutting back contributions made to staff pension pots to the legal minimum of 3 percent.

An informal poll of more than 600 employers found 42 percent of those that currently pay more than the statutory minimum of 3 percent would reduce their contributions.

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The net effect would be to reduce the amount of money going into a worker’s pension pot (Image: Getty)

At the same time, 63 percent also said they would be less likely to raise pension contributions in future if national insurance became payable on them.

The net effect would be to reduce the amount of money going into a worker’s pension pot by hundreds of pounds a year, which could reduce the total amount available on retirement by many thousands of pounds.

Employers said the change could see them make cuts in other employment benefits, such as private health care, in order to cover the costs.

The poll was commissioned by the Association of British Insurers (ABI) and the Reward and Employee Benefits Association (REBA).

Yvonne Braun, policy director at the ABI, said: “We want to see money flowing into pensions to drive growth and we also want employers to be incentivised to provide good pensions for their workers.

“These changes would have a negative impact on both. They would also mean lower retirement standards in the future at a time when we’re already not saving enough for the long term.”

Becky O’Connor of pensions and investment experts PensionBee warned: “Altering the way National Insurance is levied on pension contributions may raise revenue, but it could have the negative consequence of making employers less generous in their pension offers to employees.”

Sir Steve Webb, a former Lib-Dem MP and pensions minister in David Cameron’s coalition government, suggested making employers pay NI on pension contributions would be a relatively painless for workers in the short-term, however it would deliver a huge bill to employers, potentially hitting profits, investment and economic growth.

Sir Steve, who is now a partner at LCP, the pensions consultants, argued that applying NI to employer contributions would be easier than other options being considered to raise taxes.

“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,” he said.

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.

LCP said: “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.”