Reports that chancellor Rachel Reeves will slap national insurance (NI) on employer contributions in the October budget to help fill the £20 billion black hole have been slammed as “dreadful” by Baroness Ros Altman.
The treasury has asked key pension providers about the feasibility of levying NI on employer pension contributions, according to a report from Citywire New Model Adviser.
However, critics warned that the idea would kill off salary exchange schemes, also known as salary sacrifice, and maul the success of auto-enrolment.
‘Monumental minefield’
Commenting on the plans being floated, Baroness Altman said: “This would indeed be a truly dreadful thing to do because it would up-end all the administration systems of auto-enrolment pensions. Most pension contributions are made using so-called ‘salary sacrifice’ which means that employers and employees can share the benefits of the NI reliefs.
“If this relief is no longer available, all the administration systems would need to be completely re-programmed and salary deals would have to be renegotiated – it is a monumental minefield and I am astonished that commentators have not mentioned this practical issue. It certainly would take longer than a year to do.”
She said that while, in principle, NI relief is a pure taxpayer subsidy of pensions, there is no recovery of NI on the pensions paid in later life. She added that the cost of NI relief is now well over £10 billion a year as the cost has risen significantly.
System overhaul
“The whole system of pensions tax relief needs to be overhauled in a careful, considered holistic manner, not just tinkering with bits,” Baroness Altman said.
As an alternative, she suggested that if the chancellor did want to save money, she could insist that pension contributions must be invested, at least up to a certain proportion, in UK assets. This would save the taxpayer the costs of government investment that will otherwise be required, the former pensions minister said.
“Pension funds could have a choice: if you don’t want to put, for example, at least 25 percent of your pension contribution into the UK, then you will not receive the taxpayer subsidy. It would be your choice. You could even choose a higher figure.”
She said that when there is money already in pension funds, this should be targeted towards the UK over time too.
“This kind of shift in institutional support for UK markets would be a game changer for the economy and UK financial markets. A virtuous circle that could revive growth.”
Government ‘own goal’
Brendan Shanks, CEO of Husky Finance, also raised concerns.
“This would be a huge own goal for the new government as it attacks auto enrolment into pensions, which is probably the single biggest UK government policy success in my working lifetime, creating over 10 million new pension savers since it started in 2012.
“If Reeves removes the benefit of salary sacrifice on pensions nearly 7 million workers will have their net pay decreased, which is a tax rise on working people. Employers will face a large increase in costs and a huge admin burden. With UK firms struggling and nearly half of UK households unable to deal with an unexpected £300 bill, this move would be a terrible mistake.”
