From tax to jobs: how the UK economy has evolved under Rachel Reeves<\/a><\/p>\nReeves is expected to use the budget to cap the amount of someone\u2019s salary that can be sacrificed without incurring national insurance payments at \u00a32,000 a year.<\/p>\n
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 \u00a350,000 and 2 per cent on income above that.<\/p>\n
The change will hit workers who use salary sacrifice schemes to pay more than \u00a32,000 into their workplace pension, with employees recommended to save at least 15 per cent of their salary for retirement.<\/p>\n
A basic-rate taxpayer earning \u00a350,270 who puts aside 6 per cent of their salary would pay \u00a380 more in national insurance a year. If they chose to set aside \u00a35,000, equivalent to 10 per cent of their salary, the national insurance hit would be \u00a3240.<\/p>\n
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.<\/p>\n
Currently, any firm that runs a salary sacrifice pension scheme does not pay the 15 per cent employer national insurance tax on the proportion of salaries that go into workers\u2019 pensions.<\/p>\n
Under Reeves\u2019s plan, that exemption would be limited. As a result the cost to a company for a worker earning \u00a350,270 and putting 10 per cent of their salary into a pension would be \u00a3450 more a year.<\/p>\n
Steve Webb, partner at pension consultants LCP, said: \u201cSalary sacrifice schemes have been around for a long time and are a way of encouraging employers to offer good workplace pensions.<\/p>\n
\u201cIntroducing a cap would increase national insurance bills mostly for employers and hits the very firms who are doing the right thing.<\/p>\n
\u201cOnce a cap is in place, there will be a widespread expectation that this is the thin end of the wedge and eventual abolition is on the cards. At a time when we need workers and firms to put more focus on pensions, this would be a seriously backward step.\u201d<\/p>\n
Steve Hitchiner, chair of the Society of Pension Professionals tax group, warned that this meant many employers would be forced to reduce the generosity of their pensions scheme to claw back the additional tax.<\/p>\n
\u201cThis change will significantly increase the cost to employers who are providing pension salary sacrifice arrangements to their workers, as they will be liable to pay 15 per cent national insurance on any contributions paid by their employees via salary sacrifice,\u201d he said.<\/p>\n
\u201cFirms are unlikely to be able to absorb this cost, and our expectation is that this will be passed down to employees, through less generous employer pension contributions or smaller pay rises.\u201d<\/p>\n
Research by HM Revenue & Customs which found strong opposition to the change among businesses.<\/p>\n
Firms told the government it would result in a \u201creduction of benefits\u201d for their workers and could \u201cdisincentivise saving into a pension\u201d.<\/p>\n
They also warned that it would be \u201clikely to affect employee morale as they would have to face additional charges of NI that they had previously not incurred\u201d.<\/p>\n
One company told the researchers that they would be left to explain to their employees \u201cwhy their payslip is going to be varying so much when as far as they\u2019re concerned, their earnings haven\u2019t moved materially.<\/p>\n
Another added: \u201cThey [the government] are looking at how they can increase their revenues through the back door.\u201d<\/p>\n
Some employers said that depending on the impact of the changes they could stop offering salary sacrifice schemes altogether.<\/p>\n
Analysis<\/p>\n
By Mary Downer<\/p>\n
You can currently save up to \u00a360,000 into your pension every year without paying any income tax on contributions.<\/p>\n
A third of private sector employees use salary sacrifice schemes to save into their pensions before tax is deducted, according to the Society of Pension Professionals. This allows both employee and employer to save on national insurance contributions.<\/p>\n
If the government capped national insurance savings on pension contributions at \u00a32,000 it would hit higher earners the hardest. A worker earning \u00a345,000 who saves 5 per cent of their salary would have to pay \u00a330 more in national insurance and their employer \u00a334.<\/p>\n
However, someone earning \u00a3125,000 who saved \u00a325,000 of their salary into their pension through salary sacrifice could have to pay \u00a3460 more in employee national insurance, and their employer \u00a33,450, according to the accountancy firm RSM.<\/p>\n
Those earning between \u00a3100,000 and \u00a3125,140 have tended to rely on salary sacrifice schemes to offset the impact of punishing tax cliff edges which mean they can face a marginal tax rate of over 60 per cent. After earning \u00a3100,000, employees start to lose their tax-free personal allowance at a rate of \u00a31 for every additional \u00a32 earned.<\/p>\n
For parents, the cliff edge is even steeper as tax-free childcare allowances are forfeited, and free childcare hours are halved. Many of these parents use salary sacrifice to reduce their tax burden, as the \u00a3100,000 threshold is based on \u201cnet adjusted income\u201d, calculated after tax and salary sacrifice. <\/p>\n
A cap on NIC relief on salary sacrifice could cost these parents thousands in pension savings, providing such schemes continue to run after the tax savings for employers are slashed.<\/p>\n","protected":false},"excerpt":{"rendered":"Rachel Reeves will announce a stealth tax raid on retirement savings, a move experts said would reduce take-home…\n","protected":false},"author":2,"featured_media":279088,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[14],"tags":[64,63,99,186,184,185],"class_list":{"0":"post-279087","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-personal-finance","8":"tag-au","9":"tag-australia","10":"tag-business","11":"tag-finance","12":"tag-personal-finance","13":"tag-personalfinance"},"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/279087","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/comments?post=279087"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/279087\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media\/279088"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media?parent=279087"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/categories?post=279087"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/tags?post=279087"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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