Former pensions minister Steve Webb argues that higher costs for employers will make it harder to increase pension contributions later.
Employer national insurance (NI) is to rise to 15% from the next financial year, chancellor Rachel Reeves announced in parliament today.
The threshold above which NI is payable is to drop from £9,100 to £5,000, she said.
The government chose not to introduce NI on pension contributions, which was one of many tax-raising options rumoured to be under consideration.
However, commentators have warned that the decision to impose more costs on businesses could lead to companies seeking to save money elsewhere by cutting pension contributions.
In addition, Steve Webb, partner at LCP and a former pensions minister, said the NI decision was “terrible news” for efforts to improve retirement saving as it could make it more difficult to raise employer pension contributions under auto-enrolment in the future.
“Even the government accepts that millions of people are not saving enough for a decent retirement, and there is no doubt that part of the answer is workers and their employers contributing more,” he said.
“But with employers already having to absorb a big increase in payroll costs, it seems highly unlikely that the government will try to ‘double dip’ and ask employers to pay more for pensions any time soon.”
Even changes to the age and earnings limits for auto-enrolment could be “stuck in the slow lane”, Webb said, as each would require employers to pay more.
Cutting contributions on the cards
Hannah English, head of DC corporate at Hymans Robertson, voiced concern that the additional cost could “harm today’s ‘working people’ in their defined contribution (DC) pension schemes”.
“While the perception that the recent reductions in defined benefit scheme funding costs have created more than enough breathing space for extra national insurance contributions for UK corporates on their wage bills, we are concerned the opposite is true,” she said.
English added: “The change announced by the chancellor may be the final straw for those employers that have upheld their generous pension contributions despite difficult economic conditions. In this case, such scheme contribution structures may get overhauled.”
Damon Hopkins, head of DC workplace savings at Broadstone warned that higher national insurance payments for employers “will add to the financial pressures that businesses are already experiencing”.
“With the exception of very small businesses, this revenue raising measure is likely to have immediate knock-on consequences, whether that is pausing hiring, scaling back or scrapping pay increases, or reviewing existing employee benefit arrangements,” Hopkins said.
A boost for salary sacrifice?
Some have speculated that employers may opt for a salary sacrifice approach to contributions, whereby contributions are made before the money hits an employee’s payslip.
Martin Willis, partner at Barnett Waddingham, said: “In a complete turn of events, rather than the death of salary sacrifice, we’re now looking at a scenario where it becomes a no-brainer as it offers increased savings to employers.
“While employees won’t see any additional NI saving – unless their employer shares any of the savings – the potential to move into lower tax and benefit assessment brackets will only become more relevant as people feel the squeeze from suppressed salary increases and increasing costs of goods and services.”
Jamie Jenkins, director of policy at Royal London, said: “We may see an increase in schemes moving to a salary exchange arrangement as the increase will apply to salary paid and not pension contributions.
“Furthermore, business-owning employers might want to consider how they structure taking money out of the business to ensure the most tax efficient outcome.”
Steven Cameron, pensions director at Aegon, argued that, as pension contributions are not subject to national insurance, this was now an “even more tax efficient” employee benefit for companies to provide.
He welcomed the decision not to bring pension contributions into the scope of national insurance, as higher payments into schemes “can make a huge difference to the retirement prospects of their employees”.
