The Government continues its fishing expeditions on budget taxation withe the FT being given the job of promoting the levying of national insurance on employer contributions into people’s pensions, this would include contributions made by savers who elect to sacrifice salary for a larger payment from the boss.

National insurance on workplace pensions? No- not pensions in payment!

I initially thought that the Government were proposing (through the FT) that pensions paid to those with pensions in payment should become liable national insurance which would hit the lucky ones with defined benefits. This would have the virtue of enabling those of us (I am one) who spend a lot of time being helped by the NHS, to pay a little more. But it looks like that bright idea is not on the agenda. Perhaps it is a little too like the Government taxing itself, since most of these pensions are for those who worked in the public sector.

National insurance on exploitation by the well off worker? Yes to national insurance.

The FT are replaying a story in the Times (suggesting that HMT are fishing in pools where there are plump fish).

Reeves is set to introduce a new threshold of £2,000 which can be put towards such a scheme, above which it will incur national insurance payments at the usual rates — 8 per cent on salaries under £50,270 and 2 per cent on income above that.  

This is like making the catch of fish small but lucrative, it estimates taking £2bn out of the pots of those who are well off and using pensions as a means to minimise tax and national insurance payments. This is something that a Labour Government does which a Conservative Government dare not (the Tory backbenchers would not let them).

Not those with cash to come then?

But it looks like the Government are hinting that those with tax-free cash entitlements will not be hit by changes. I suspect that this has run into trouble with those who have public sector pensions where the calculation and payment of a tax-free cash sum are a little more complicated and a little more overtly a promise than an option. I am not being facetious about civil servants protecting their own interests though if Reeves (advised by Torsten Bell) goes for the accumulation of pots by the rich this will look a little conflicted!

So what does this mean for the well off – sacrificing pensions?

The FT went to a report called “Understanding the Attitudes and Behaviours of Employers towards Salary Sacrifice for Pensions”. A report by the HMRC in May

The tax agency said it would mean a worker earning £35,000 who had sacrificed 5 per cent of their salary paying no additional NICs.

Someone earning £45,000, also sacrificing 5 per cent, would pay an additional £30 a year in national insurance and their employer would pay an extra £34.

Yet the impact would be much proportionately greater on high earners. Accountancy firm RSM has estimated that someone earning £125,000 and saving £25,000 of this into their pension would pay £460 more in NICs and their employer £3,450.

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Who have most to fear?

The people who will be finding that kind of “taxation” (NIC isn’t actually a tax but..) will be those who consultancies work hardest to protect, so it is not surprising consultants being up in arms.

The changes could also hit high earners on salaries between £100,000 and £125,140 who in recent years have put more of their cash into salary sacrifice schemes to offset the impact of tax “cliff-edge” rules which mean high earners can be hit with a marginal tax rate of over 60 per cent.

Steve Webb, partner at pension consultants LCP, told the Financial Times:

“Salary sacrifice is used as a way of reducing the cost to employers of providing decent pensions.  Coming on top of last year’s hike in employer NICs, capping salary sacrifice will further increase employer costs and may well result in employers reconsidering the generosity of their pension offer”

Of all the problems employers have faced funding pensions, this looks a small one. My hope is that employers will start thinking of making these contributions better value for money to their staff than is the case at present.