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National Insurance on employer pension contributions could raise billions for Treasury coffers

September 30, 2024

The introduction of national insurance on employer pension contributions could generate billions for the Treasury, according to Sir Steve Webb, a former pensions minister.

Webb, now a partner at LCP, suggests that this reform could raise up to £16 billion net per year and might be the most likely measure Labour Chancellor Rachel Reeves adopts to raise funds in next month’s budget.

Currently, employers pay no national insurance on pension contributions. If a tax at the standard rate of 13.8% were imposed, it could raise a gross £24 billion. Adjusting for the cost burden on public sector employers, such as the NHS and schools, the Treasury would still gain around £16 billion net. Even a lower rate of national insurance, around 2%, could generate a couple of billion pounds annually.

This proposal is seen as a politically viable option, as it avoids immediate impacts on employee pay packets. Webb believes that alternatives, such as reducing the tax-free lump sum for pensioners or introducing a flat rate of tax relief, would be far more difficult politically, especially as they could impact millions of public sector workers.

However, the proposal is not without controversy. Charging national insurance on pension contributions could anger employers, already facing rising costs from higher wages and interest rates. The move would also appear to clash with Reeves’s pro-growth agenda and might be perceived as a tax on jobs.

Webb’s analysis aligns with recommendations from think tanks like the Institute for Fiscal Studies and the Resolution Foundation, which have called for reforms to pensions tax relief, particularly as current policies tend to benefit higher earners. The Institute for Fiscal Studies has argued that there is a strong case for reform, highlighting how current tax relief policies disproportionately benefit wealthier individuals and employers.

With Labour seeking ways to repair the public finances while avoiding measures that would impact working families, this potential reform is seen as a way to generate significant revenue with minimal immediate political risk. The gross cost of pensions tax relief currently stands at £70.6 billion, but after tax is recouped from pensioners, the net cost to the Exchequer is about £49 billion. Even modest savings in this area could substantially benefit the Treasury’s tax and spending plans.