Workers’ pension pots could be worth tens of thousands of pounds less than expected if Rachel Reeves imposes national insurance on salary sacrifice schemes, with three quarters of companies warning they would not top up their employer contributions.
A survey by the Confederation of British Industry (CBI) suggests few businesses would be able to absorb the costs if the chancellor axes salary sacrifice schemes or charges national insurance above a new cap.
This would result in monthly contributions to their workers’ pension pots shrinking because part of their current payments would be diverted to meet the additional national insurance bill.
The CBI surveyed some of the largest companies in the country as part of its report. Those who were sent the survey include DHL, Shell, NatWest, Tesco and the defence giant BAE Systems.
While the CBI did not release the names of the companies who responded, it is understood they span retail, financial services, manufacturing and technology, with one company warning that the government’s planned tax raid would add £4.7 million to its annual payroll bill.
Among the respondents, 74 per cent of firms said they would not increase their employer contributions to offset their workers’ lost contributions from paying national insurance. Only 13 per cent said they would top up contributions to offset the new tax liability.
Rain Newton-Smith, the CBI’s director-general, said Reeves now risked “putting up the cost of employment” again, having already hiked employer national insurance in last year’s budget.
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She said: “Last year’s NICs changes have seen some businesses already reducing headcount and scaling back investment, and a ‘stealth tax’ on pensions risks doing the same.
“It would be particularly hard for employers who share their NICs savings with staff, a move that boosts pension pots and reduces state burdens down the line — that’s why businesses have told us it’s ‘a tax on doing the right thing’.
“The government’s own Pensions Commission is looking at how to address under-saving for retirement right now. Introducing a short-sighted revenue-raising measure now would pre-empt its work and could cost more in the long-run.”
Under the current tax rules, there is no limit on the amount that someone can put into their work pension under salary sacrifice. The schemes allow people to lower their taxable income, reducing both their income tax and national insurance contributions. Companies also benefit as they only pay 15 per cent employer NICs on the worker’s adjusted income after pension contributions have been made.
The schemes have been credited with encouraging people to put more into their pension and also help families avoid cliff edges in the tax system, such as the loss of child benefit and free childcare hours, by deliberately reducing their incomes.
However, Reeves is expected to use the budget to cap the amount that someone can sacrifice without incurring national insurance payments at £2,000 a year.
Rachel Reeves, the chancellor, will deliver the budget on Wednesday
CARLOS JASSO/AFP/GETTY
Any pension contributions over that level would result in an employee paying the full rate of national insurance of 8 per cent on a salary of less than £50,000 and 2 per cent on income above that.
Pensions experts warned that many employees would face a double hit as companies would also lose the tax break that allows them to fund generous employer pension contributions.
In a recent report the Resolution Foundation, the think tank influential in government circles, suggested Reeves should introduce a charge on salary sacrifice pension contributions, equivalent to half the full rate of employer NICs, or 7.5 per cent.
According to the CBI’s analysis, a 22-year-old man on the median income (currently £37,382) expecting to retire at state retirement age of 68, who put a 9 per cent combined contribution into their pension pot annually, would retire with £223,297.
If an employer reduced their contribution by 1 per cent, that pension pot would fall to £198,486 on retirement, a reduction of almost £25,000.
The reduction would be even starker for a 22-year-old higher-rate taxpayer, whose employer would typically make a higher contribution of about 6 per cent for those earning between £50,000 and £60,000.
Were that worker’s company to cut its contribution to the minimum required — down from 6 per cent to 3 per cent, their projected pension pot on retirement would fall from £438,048 to £318,580, a loss of nearly £120,000.
The CBI received responses from 23 businesses that operate salary sacrifice pension schemes about the impact of a 7.5 per cent charge. The survey included a broad section of the UK-economy, ranging from medium-sized firms through to household names employing thousands of workers.
Companies who responded were highly critical of Reeves’s planned pensions raid, with one describing it as a “stealth tax that punishes firms for helping people save for retirement”. Another said it was a “terrible idea that would hit employees’ pension pots and make saving for the future harder at exactly the wrong time”.