Hugo Gravell, Principal and Investment Consultant at Barnett Waddingham, comments: "The Government’s announcement of a 1.2% increase in employer NI contributions may well lead businesses to tighten their purse strings, with employees left to pick up the tab through lower salary increases - and by extension lower pension contributions. The change could reduce this year’s salary increase by almost 2.5% for an employee who earns £35,000 and was due to get a pay rise of 3% before the change. The one-off reduction in the lower threshold for paying NI is a big driver of this. But the announcement will make paying salaries more expensive in future years too. If businesses react by reducing annual salary increases by just 0.5% in the future, the impact for DC savers would be significant. A typical 35 year-old contributing 8% of their salary could end up with a pot 4% smaller by the time they get to retirement – and an annual income in retirement around £700 smaller in today’s money.
"Is there some good news? The Chancellor’s decision to unfreeze income tax thresholds after 2028 is welcome news for DC savers. If the freeze was extended for just two more years, a member looking to achieve the PLSA’s minimum standard of living would have needed to save almost 5% more, and almost 1% more for the Moderate standard and 3% more for the Comfortable standard. The Chancellor deciding against this avoids a double whammy hit to younger savers. And, while changes to inheritance tax won’t be welcomed by many, the quality of retirement for those above 60 years old will be less affected by the NI changes.
"Overall, it looks like young savers could be hit the hardest by the announcements – even if taking their pension feels a long way off. Having said that, the ultimate impact is likely to depend on whether the Chancellor can achieve a meaningful uplift in economic growth and productivity through her new investment rule. That will have the largest bearing on future salary increases, contributions, and the UK population’s retirement prospects. Growth forecasts suggest this is not a slam dunk. The Prime Minister himself highlighted over the weekend that tax and spend is not enough: reform will be essential to kickstart the economy. For now, we’ll be watching next week’s Mansion House speech closely."
Detailed analysis from BW on the cost of the NI hike to employers and impact on pensions:
Increased cost to employers:
• For an employee on a £35k salary (average salary) – extra £925.80 employer NI
• For an employee on a £60k salary – extra £1,225.80 employer NI
• For an employee on a £100k salary – extra £1,705.80 employer NI
In each case, £615 of this is due to 15% NI on salary from £5,000 to £9,100.
Death of the pay rise?
Employers who had budgeted to award a 3% pay increase would need to reduce these increases to
• 0.67% (£35k salary)
• 1.19% (£60k salary)
• 1.49% (£100k salary)
to mitigate the increases in costs (ignoring pension contributions and other salary-related employee benefits).
Impact on a 35 year old saver at retirement
Importantly, this is not a one-off windfall tax. Paying salaries will be more expensive in future years too. If businesses react by reducing annual salary increases by just 0.5% in the future, the impact on DC savers would be significant:
• For an employee on a £23,795 salary (minimum wage) – over 4% smaller pot at retirement, and an annual income around £500 smaller in today’s money
• For an employee on a £35k salary (average salary) – over 4% smaller pot at retirement, and an annual income around £700 smaller in today’s money
• For an employee on a £60k salary – over 4% smaller pot at retirement, and an annual income around £1,200 smaller in today’s money
• For an employee on a £100k salary – over 4% smaller pot at retirement, and an annual income around £2,000 smaller in today’s money
The appeal of salary sacrifice
The attraction of NI savings through pension salary sacrifice is enhanced with the increased employer NI rate. Where not already offered - if the employees above pay 5% pension contributions, and shift to paying through salary sacrifice:
• Employee £35k salary – extra employer NI reduces from £925.80 to £663.30, and salary increase could be 1.32% rather than 0.67%
• Employee £60k salary – extra employer NI reduces from £1,225.80 to £775.80, and salary increase could be 1.84% rather than 1.19%
• Employee £100k salary – extra employer NI reduces from £1,705.80 to £955.80, and salary increase could be 2.14% rather than 1.49%
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