The Chancellor could be about to mount a backdoor raid on pension contributions to raise as much as £16 billion a year, according to a former minister.
Sir Steve Webb, a former Lib-Dem MP and minister in David Cameron’s coalition government, warned such a step could hit the pension pots of workers.
He suggested it could be achieved by requiring employers to pay National Insurance on the pension contributions they pay into staff pension pots.
The former minister suggested that the move would be relatively painless for workers, but it would deliver a huge bill to employers, potentially hitting profits, investment and economic growth.
Currently many employers make higher contributions to staff pensions than the legal minimum figure of 3 percent. However, introducing NI on these contributions could see them scale back pension payments.
This would hit the size of the pension pot that workers are able to build up in order to fund a comfortable retirement.
The move would hit the size of the pension pot that workers are able to build up (Image: Getty)
Tax relief on pensions costs the government some £49 billion a year and the chancellor, Rachel Reeves, is understood to be eyeing up reducing this figure to help fill a claimed £22 billion in government budgets.
Sir Steve, who is now a partner at LCP, the pensions consultants, argued that applying NI to employer contributions would be easier than other options. These include reducing the tax-free lump sum that can be taken on retirement or bringing in a single flat rate of relief on employee pension contributions.
He said employers pay no national insurance on pension contributions as things stand. If raised to the standard rate of 13.8 per cent that they pay on normal wages above £175 a week, this would raise a gross £24 billion.
After adjusting for the extra cost this would impose on public sector employers like the health service and schools, the net boost to Treasury coffers would be £16 billion.
He suggested that even a lower national insurance rate for pension contributions of, say, 2 per cent would raise “a couple of billion”.
The Institute for Fiscal Studies and the Resolution Foundation think tank have both proposed applying national insurance to employer contributions as a way of raising revenues for the government. The IFS said there was “a strong case for reform” because of the way tax relief largely benefits higher earners and those with more generous employers.
Sir Steve told the Times the approach would be attractive to Reeves because it could be introduced quickly and would have no immediate impact on employees.
It could also be pitched as a way of removing an unfairness in the way some employers use so-called salary sacrifice to reduce tax further. Under the commonly used device of salary sacrifice, some employers pay staff less but agree to cover the cost of their pension contributions.
He said an alternative way of boosting Treasury coffers would be to make pension contributions no longer eligible for salary sacrifice.
“The big advantage for the chancellor is that in most cases this [changes to NI] would have no immediate pay-packet effect on voters, so would have lower political saliency. It could also be implemented relatively quickly,” he said.
Pension tax relief is viewed as a fundamental way of encouraging workers to save for their old age and avoid becoming a burden on the state. The gross cost of it is £70.6 billion, though the government recoups £22 billion from pensioners paying more income tax as a result, leaving a net bill of £48.7 billion, according to LCP calculations.
LCP said: “If the government could save even a small percentage of this total cost, it could make a meaningful contribution to the Treasury’s overall tax and spending plans.”