Despite the long tail of auto-enrolling employers paying no more than the bare minimum into workplace pensions (3% of band earnings), the vast majority of pension payments are discretionary.

Large employers pay more than 3% to be competitive, as a sop to those kicked out of defined benefit pension schemes and because it is a cheaper way for staff to get pensions than for them to do it by direct debit or as a payroll deduction.

Employers pay more than they have to and encourage staff to do the same. Employers allow staff to swap personal contributions for a reduced salary and a higher pension contribution. This can take advantage of the exemption on national insurance on employer contributions into people’s pension pots or into the big  pot that pays wage for life pensions for DB members.

The more that Government hikes up national insurance, the more attractive these salary sacrifice arrangements come and most companies share some or all of the national insurance savings with staff making salary sacrifice an employee benefit in itself.

On Sunday, Jonathan Reynolds refused to rule out changes to employer national insurance rates on pension contributions. Mary McDougall of the FT was clearly watching the BBC at 9am as I was and she’s written an interesting piece about the impact of charging employer’s NI on pension contributions.

A tax on pension accumulation

The total cost of tax exemptions on pensions is about £70m pa which nets down to £50m pa if you take into account income tax paid on pensions in payment (and on muppet like behaviour on drawdown).

The Resolution Foundation thinks that if employers were required to pay the full 13.8% NI rate on all pension contributions, this would reduce that £50bn figure by £12bn pa. Steve Webb thinks the Treasury would only have to charge 2% NI to raise “a couple of billion quid” – (which might do the trick and protect people’s tax free cash).

But it’s not a victimless tax (none of them ever are). Here’s Mary’s analysis

Businesses’ reaction will depend on what the rate is. A poll by the Association of British Insurers and the Reward and Employee Benefits Association found that 42 per cent of companies that currently pay pension contributions above the auto-enrolment minimum would lower them if NI was introduced.

A high rate, such as 13.8 per cent, might also lead companies to rethink salary sacrifice schemes where individuals receive a lower salary in exchange for higher pension contributions. This enables staff to reduce their income tax bill and employers to cut their NI bill. But a higher rate could mean the benefit to companies evaporates.

Small companies would be hit hardest. Martin McTague, national chair of the Federation of Small Businesses trade group, said adding employer NI to pension costs would be “one way of shrinking small business employment even more in 2025”, after thousands of job losses since early last year

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Go figure

Unless the Chancellor backs down on all pension raids (because she’s changed her fiscal rules and is no longer in trouble) , she’s got precious little left to tax but CGT and pensions.

If she taxes pensions by reducing the tax free cash allowance and/or IHT exemptions on pension pots she hurts the wealthy pensioner but leaves the bulk of savers alone. These are wealth tax-rises (as are CGT increases).

If she taxes money on the way into pensions , she not only pisses off all the “hard-working savers” but their employers and the pensions industry (which she is relying on to come up with £50bn of productive finance).

Who would you rather piss off?

Frankly, this sniff-test of how tax rises go down with medical consultants and civil servants is for the birds.

A pensions system relies on savings incentives for its big “E” xemption. “T” ax investment growth or exemptions on exit but don’t stop the flows. You need the long-term assets associated with people’s savings and their spending of their pension. Don’t bite the hand that feeds.

And then there’s DB

Despite reports that DB is now in surplus, it is only in aggregate surplus. Many companies are struggling to meet deficit contributions required by their Trustees and TPR. Putting up to 13.8% on the cost of those payments or on top-up payments to get the pension to buy-out could see more schemes failing and dragging employers down with them and it would definitely reduce the de-risking of balance sheets. It will also have an impact on schemes investing to run schemes on and invest in the kind of assets Rachel Reeves needs for her economic revival.

Employer contributions into DC can’t be treated differently from DB, we are all in the same tax-boat.  I see no way that the Chancellor is going to screw up the planning of corporates around their pension schemes when she has much easier and plumper targets elsewhere.

Tax the wealthy pension pot holder not the struggling saver

It is sometimes hard to remember that we now have a Labour Government but even though this one’s particularly business friendly and has already taken winter fuel allowance off pensioners, I don’t see her robbing savers to keep those with pots of £400k and private pensions of £20k pa in tax-free cash.

There are better ways of taxing society than by taxing pension contributions and Mary McDougall is right, messing with the system that is working well right now risks driving many small employers into the kind of poor working practices that the Labour party is doing away with.