Looking Ahead series: Autumn Budget 2024 - article nine
Employer and employee National Insurance relief on employer pension contributions is the unsung hero of fiscal rewards for pension saving. It receives far less attention than income tax relief on pension contributions, but NI is not merely deferred – it is not charged on pension income, either.
NI relief makes it cheaper for employers to pay employees though pensions than through salary – and therefore, for any given outlay, the employer can add more to the employee’s pension than their pay packet.
For example, consider an employer who wants to spend an extra £1,000/year rewarding an employee who is a basic rate taxpayer.
For the same reason, it can be advantageous for employees to pay their own contributions via “salary sacrifice” – that is, instead of contributing to the pension directly, they exchange part of their salary for an employer pension contribution.
As long as there is only one rate of employer NI (as there is now – 13.8%), ending employer NI relief, or providing it at a lower rate, should be a relatively straightforward change to administer. There would be no need to allocate contributions to individuals, which would avoid many of the problems with defined benefit schemes discussed in our article: Ending marginal rate tax relief on UK pension contributions, on flat rate tax relief.
HMRC estimates that private sector employers received £10bn of employer NI relief in 2022/23. A further £5bn of employer NI relief is money that public sector employers currently do not have to pass straight back to the Exchequer – seeking to recover this lost revenue would be akin to cutting the budgets of NHS Trusts/schools/etc. ITV has reported that the Budget will raise around £15bn from applying NI to employer pension contributions, implying that they would be subject to the full rate.[1]
If employer NI relief were abolished, or reduced, the relevant sums would either be siphoned off employer contributions on their way into pension schemes or charged to employers directly. An increase in the cost of employing people would either make it harder to do business or get passed on to employees, depressing pay growth and/or pension contributions. Some employers might reduce pension contributions, where these are above statutory minimum levels, and tell employees that this is in response to the Budget.
A smaller employer NI charge, below the full 13.8%, might be more consistent with pre-election reports that the Chancellor was looking to raise money through 10-12 changes that were relatively modest in isolation, but which added up[2]. But even in that case, the Rubicon would have been crossed and business/investor confidence could be hit, with many people questioning how soon it would be before the Government chose to increase the rate further.
Labour’s manifesto said “Labour will not increase taxes on working people, which is why we will not increase National Insurance…” When the Conservative Government increased employer National Insurance, the Office for Budget Responsibility said “we assume that the economic incidence of the tax is passed through entirely to lower real wages in the medium term”[3]. Nonetheless, the Government appears to believe that its manifesto does not preclude raising employer NI: the Business Secretary has said that the manifesto promise was “specifically a reference to employees”[4] while the Chancellor says “that commitment was around taxes on working people”[5].
Increasing the rate of employer NICs would increase the fiscal advantages of paying employees through pension contributions, while applying employer NI to employer pension contributions would reduce them. Some conceivable changes – such as increasing the employer NI rate and only applying the addition to pension contributions – may not alter these incentives, at least initially.
The Institute for Fiscal Studies has proposed removing the existing charge to employee NI on employee pension contributions (and keeping the employee NI exemption in respect of employer pension contributions) and then charging employee NI on income in retirement[6].
There would need to be choices around how to phase in employee NI on retirement income – noting that:
If private pension income were subject to employee NI in the same way as employment income, the main rate (8%) would be above the rate of employee NI relief that people earning above the Upper Earnings Limit received in respect of employer contributions (currently 2%, and zero for contributions paid before 2003). However, the Government might argue that this is acceptable in the context of no employer NI having been paid and when many people who received higher-rate tax relief on contributions pay basic rate income tax in retirement (band shifting).
It is sometimes suggested that the Government could target salary sacrifice.
However, only around one-sixth of NI relief is in respect of salary sacrifice contributions, limiting the revenue that is even in theory up for grabs.
This would also introduce unequal treatment between employees with exactly the same combination of employer pension contribution/remaining salary based on whether this reflected the original employment contract or a subsequent variation. Going forward, it might lead to higher employer contributions (and lower pay) being offered as standard or negotiated during recruitment.
Restrictions on new salary sacrifice agreements might be considered in the event that the Government decided to end higher rate tax relief on individuals’ pension contributions but not to tax employer contributions as a benefit-in-kind in order to deliver equivalent treatment.
There are good arguments for retaining incentives specifically targeted at employer contributions:
