Labour is being urged to explore a significant shift in pension taxation to help manage government spending.
The move has sparked extensive debate, with experts warning of potential repercussions for employer contributions to staff pensions.
Proposal for National Insurance on Pension Contributions
A left-leaning think tank has proposed that companies should be required to pay National Insurance on contributions made to staff pension schemes. They argue that the current tax relief is “unnecessary” and “arbitrary”. This proposal has raised concerns among experts who warn it could disincentivise employers from contributing to staff pensions.
Concerns from Experts
Steve Webb, former pensions minister and current partner at consultancy LCP, cautioned, “We want employers to be generous and pay generously into people’s pensions. The more we tax them for doing that, the less they will do.”
Under the existing rules, employees must contribute a minimum of 5% of their salary to a workplace pension, while employers pay at least 3%. Although employees pay National Insurance on their contributions, companies are exempt.
Proposed Tax Alignment and Its Impact
The Resolution Foundation suggests aligning the tax treatment of company contributions with the 13.8% rate applied to other employer National Insurance contributions.
Such changes would impact millions of workers, particularly those receiving contributions above the minimum rate. Many companies currently offer matching schemes, with around 13.9 million employees benefiting from contributions exceeding 4% of their pay.
Critics argue that implementing this tax could lead employers to reduce their pension offerings or adjust compensation to offset the increased tax burden.
Potential Revenue and Political Risks
The think tank estimates that these changes could generate £9bn for the Treasury and also recommends raising inheritance tax and capital gains tax to secure an additional £20bn. These measures aim to help avoid severe public service cuts.
However, adopting such measures could expose Labour to accusations of breaking its election pledge not to raise taxes on working people.
Broader Discussions on Pension Tax Reform
The Resolution Foundation’s suggestion comes amidst broader discussions within Labour about pension tax reform. Baroness Drake, a prominent figure in Labour’s past pension reforms, has advocated for a “flat rate” tax relief approach.
This policy shift would see high earners paying more tax on their pension contributions, potentially reducing the tax advantages enjoyed by wealthier savers.
Such reforms could affect up to six million higher and additional rate taxpayers.
Employer Contributions and the Economy
Critics like Steve Webb emphasise the importance of employer contributions in ensuring robust pension schemes for employees. “Generous employer contributions are crucial for employees’ financial security in retirement,” Webb noted.
Taxing these contributions could lead to a significant restructuring of compensation packages across various industries.
Recommendations for Future Policy
The think tank’s recommendations include not just the National Insurance alignment but also increases in inheritance and capital gains taxes. These measures are seen as necessary to prevent cuts in essential public services.
Labour faces a challenging decision in balancing the need for increased revenue with the potential impact on employer pension contributions.
The proposed £9bn tax on staff pensions has the potential to reshape the landscape of employer-provided benefits and provoke significant debate on pension tax reforms.
