Pensions - Articles - How would the removal of NI on pensions impact employers


With rumours abound that the Chancellor could be considering removing the National Insurance relief on employer pension contributions to raise funds in this month's budget, Martin Willis, Partner at Barnett Waddingham offers his perspective on the impact this could have on employers.

 Martin Willis, Partner at independent consultancy, Barnett Waddingham says: "As the first Budget of the new Labour Government draws closer, there have been some clear expectations we will see cost cuts come October 30th, and, inevitably pensions will likely be in their sights one way or another. "We've recently seen rumours that the Government could consider removing National Insurance relief on the pension contributions businesses make to their employees. If this were to occur, the IFS has speculated the Government could generate savings in the region of £17bn - generating significant fiscal headroom.

 "While still purely speculation, it's important to consider what impact this change could have if it were to come into effect. Notably, unlike a rate increase - as seen briefly in 2022 - sectors where employers fund generous pension schemes, whether defined benefit or defined contribution, would likely be most affected by this. And concerningly, for businesses where funding is already tight - it's likely this could indirectly impact employees' pensions."
 
 "To give a few examples: "Let's consider an employer that employs 100 people on an average salary of £40,000. If that employer contributes the auto-enrolment minimum of 3% of band earnings (£6,240 - £50,270) their business might currently be spending around £101,280 on pensions. If we theorise a NI rate of 13.8% on contributions, this means NI relief to them is worth £13,977. However, if that same employer offered access to the Teachers Pension Scheme, they would be paying broadly 28.6% - the current minimum contribution for this scheme - of total salaries. This organisation would then be spending £1,144,000 on pensions with the NI relief being worth £157,872. If the relief is removed this extra cost has to be found from somewhere. Looking elsewhere in the public sector with the same example, the impact is just as significant. For the NHS pension scheme, the employer contribution rate is 23.7% - which equates to around £948,000 spent on pensions and a relief of £130,824. Meanwhile, the Police Pension Scheme (PPS) contribution rate is even higher, at 35.3% - equating to £1,412,000 spent on pensions, and relief of £194,856.
 
 "These are all notable differences, and it’s hard to see it doing anything else other than pushing employers in this situation away from significant pension contributions or reducing their spend elsewhere. While in some instances the Government may be funding the employer, it will still result in an increase in funding to cover the additional cost."

 
  

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