The introduction of national insurance on employer contributions to pensions could generate billions for the Treasury, according to Sir Steve Webb, the former pensions minister.
Webb, now a partner at LCP, points out that this reform could raise up to £16bn net a year and could be the most likely fundraising measure adopted by Labor chancellor Rachel Reeves in next month’s budget.
Currently, employers do not pay any National Insurance on pension contributions. If taxed at a standard rate of 13.8%, it could raise a total of £24bn. Adjusting for the cost burden on public sector employers, such as the NHS and schools, the Treasury would still earn around £16 billion net. Even a lower National Insurance rate, around 2%, could generate a few billion pounds a year.
This proposal is seen as a politically viable option, because it avoids direct impacts on employee salaries. Webb believes alternatives, such as cutting the tax-free lump sum for pensioners or offering a flat rate of tax relief, would be more politically difficult, especially as they could affect millions of public sector workers.
However, the proposal is not without controversy. Imposing National Insurance on pension contributions could anger employers, who are already facing rising costs due to rising wages and interest rates. The move also appears to conflict with Reeves’ pro-growth agenda and may be seen as a tax on jobs.
Webb’s analysis is consistent with the recommendations of think tanks such as the Institute for Fiscal Studies and the Decision Foundation, which have called for reforms to tax relief on pensions, especially since current policies tend to benefit those with higher incomes. The Institute for Fiscal Studies argues that there is a strong case for reform, and highlights how current tax relief policies disproportionately benefit wealthier individuals and employers.
With Labor seeking ways to reform public finances while avoiding measures that would impact working families, this potential reform is seen as a way to generate significant revenues with minimal immediate political risk. The total cost of pension tax relief is currently £70.6 billion, but after tax recoveries from pensioners, the net cost to the Exchequer is around £49 billion. Even modest saving in this area can greatly benefit your treasury and spending plans.