Will NI on employer pension contributions be the sacrificial lamb on 16 March?

At the recent REBA New Year Lectures I was asked if I thought George Osbourne will end salary sacrifice. Last Friday’s climb-down on reforming pension taxation makes it a whole lot more likely that the answer is “yes”.

Last Friday the Treasury confirmed that wholesale pension taxation reform won’t feature in the 16 March budget. So where is the Chancellor likely to turn to help plug the deficit? Our strong suspicion is National Insurance relief on employers’ contributions. This has an annual value of £13.8bn, which is the kind of level of saving which was being sought.

Employers’ NI is far less obvious, much simpler to implement and wouldn’t directly affect the voting public. Politically this would be much easier to pull off than pension ISAs or capping tax relief.

Tax on jobs
Of course ending employers’ NI relief would be an impact. It would essentially be a ‘tax on jobs’, to the tune of about 2% of pensioned pay. This could be seen as another slice of passing cost from central government onto employers, much like the National Living Wage.

The infrastructure is largely in place to make this happen and the exemption for Class 1A and Class 1 employer contributions would easily be revoked. DB accrual contributions would need some work to measure the value, but the newly aligned tax year PIPs will make this much easier. This could also be rolled-out across the self-employed through individual tax returns. It also leaves DB deficit contributions untouched, so the Chancellor couldn’t be accused of hampering employers’ efforts to repair DB deficits.

Big implications
Clearly there are big implications of taking 2% out of your pension savings. Preparing your business to absorb the cost is one option. Redesigning your pension plans to accommodate the loss of savings and still give your employees an adequate level of retirement income is another. Either way, if this happens business leaders are going to look to the pensions and reward professionals to quantify the problem and develop solutions post haste.

Will the Chancellor do it though? We don’t know for certain. But we do know the Treasury noted that doing this could save £13.8bn in the ‘Incentive to Save’ consultation on tax relief. It’s clearly on their radar and there are very few other options to raise money to plug the deficit of a similar magnitude.

For now, wait and see

On the flipside, if we see no other significant changes this year then we will have to bed down the horrendously complex system of annual and lifetime allowances that come into force in April. We’ve advised our clients to ‘wait and see’ until there is clarity on wider changes to tax relief. Given that the Chancellor has, for now, capitulated on wider tax relief reforms, these complexities for high earners are here to stay. This means that the policies and processes to bed them down will need to be resolved as a matter of urgency ... how will you find out if Mr or Mrs Director’s income from rental property or shares takes them over the £150k threshold?

At the moment the impact of the new annual and lifetime allowances limits is limited to fairly few people, but this is set to change. By 2019 the numbers affected are set to double, to around 600,000 to 700,000. That’s around 2% of taxpayers who will be hit hard on the pension savings and need help from their employers to figure out what to do. If the Chancellor uses 16 March to remove the current ‘carry forward’ provisions then this could bite into more people even sooner.

I will post again after the Budget, either with an apology for unjustified worrying or with a heads-up on what pensions and reward leaders will be doing to deal with the challenges. Not much longer to ‘wait and see’.

This article was written by Patrick Bloomfield, partner at Hymans Robertson.