(R&T = Rachel Reeves and Torsten Bell)
What I read over the weekend does not set my heart aflame with anger, instead it makes me content that the young will be helped by an 8% rise in their minimum pay
and that it will be cheaper (in real terms) to travel by train and electric car
It strikes me that a Labour Government should be doing something to take from those with “broad shoulders” and give to those who need help most.
This article looks a little more deeply at what the ABI and others are claiming is an assault on pension saving.
In my opinion, those who can save more than £2,000 a year out of their pay to bolster their retirement will need to explain to the young and those who cram on trains why they should be allowed to duck paying the national insurance that supports the welfare for those who need help and the infrastructure that gets most workers to and around the cities to do their work.
Plans for growth paid for from “salary sacrifice schemes”
You may have read my recent thoughts on pensions benefiting from salary sacrifice; this referred to an FT article and yearned for superior analysis by David Robbins and his firm WTW.
Rachel Reeves is targeting £3bn-£4bn from pension salary sacrifice, according to this front page report by Mary MacDougall and Claer Barrett
HMRC estimates that NI relief on salary sacrifice contributions cost £4.1bn in 2023/24, almost three-quarters of which was employer relief. Since then, the main employee rate of NI has come down and the employer rate has gone up (by less), but these effects should roughly cancel out.
Wage growth and employment growth will increase the nominal cost further, especially if HMT is looking at 2029/30 (the year that matters for the fiscal rules). But the former is a double-edged sword as it will turn some 8% NI payers into 2% NI payers.
Very roughly, the projected 2029/30 cost might be ~£5bn, so the target tax grab would be 60-80% of this.
But HMRC’s estimates may have a wide margin of error. They say: “There is no legal requirement for schemes to report contributions made via salary sacrifice to HMRC. ASHE [ONS’s Annual Survey of Hours and Earnings] has been used for statistics relating to salary sacrificed contributions.”
In a recent FOI response, ONS said: “While a variable on salary sacrifice is collected as part of the ASHE, we do not process this data to produce the requested information…[answering the query]…would involve cleaning and validating the data collected to remove erroneous values from the responses”.
ASHE’s sample construction and response rate has also been criticised.
WTW recently calculated how the £2k cap in earlier reports would bite at different pay levels. The report suggests the effects of the actual policy will be bigger and will bite further down the income distribution.
Bitten?
What is clear from this table and David’s comments is that the ordinary person , the person paying 5% of earnings into a workplace pension and earning £40,000 would not be harmed by the salary sacrifice cap of £2,000 pa.
The people for whom it hurts are those paying NI at 2% while the bulk of the cost is to employers, who simply can’t pay people in pension contributions.
Unfortunately, for the financial services industry, £40,000 pa is not an amount paid to “valuable” employers. Consequently it considers the £2,000 allowance, an irrelevance.
But as the table above shows, the vast majority of the cost of salary sacrifice under the proposed “cap” on sacrifice” will be on employers who pay people over £45,000 and who determine that all employee pension contributions swap from employee to employer.
I can sense from Reward departments, a wish to cut earnings and move to a non contributory pension system but this will I am sure be cut off at the pass by a Government who have thought of this already. It would make pensions a take it or leave it benefit with an opt-out giving no upside to the staff and while it would increase take up it will need to be explained as something other than NI arbitrage.
It won’t help those who are not able to afford pension contributions and will have no “salary paid without pension deduction” option.
Who loses?
The loss of national insurance feels imminent, no doubt some firms have already rushed through bonus sacrifices that might have been planned for next January and this will all be splayed over the papers in the weeks and months to come.
But the bottom line is that £4bn is a centrepiece in the tax increase “smorgasbord” and I think that anyone who is paying less than £2,000 pa into a pension by swapping pay for pension will be no worse than before.
Those who pay more than £2,000 will either cost the employer more or cost themselves more. Either way it will end up making the “on-cost” of employing them increase and that will be felt in future wage discussions.
The only people who lose from losing salary sacrifice are higher earners and those with money to spare to put more than minimum into pensions. These are the broad-shouldered we keep hearing about. They are not the young on low wages or those struggling to pay rail fares for whom this is not a pay or pension cut at all.