Warning pension pots could be slashed in 'massive £16 billion tax raid on contributions'
A former minister suggested the Chancellor could be about to mount a raid on pension contributions in order to raise around £16 billion a year. Sir Steve Webb warned that while such measures would be 'relatively painless', it could slash worker's pension pots.
The former Lib Dem MP, who was a minister in David Cameron’s coalition government, indicated it could be achieved by requiring employers to pay National Insurance on the pension contributions paid into staff pension pots. He said this would deliver a huge bill to employers, potentially hitting profits, investment and economic growth, the Express reports.
Many employers currently make higher contributions to staff pensions than the legal minimum of three per cent. But if NI was introduced on these contributions, some could scale back pension payments, affected the size of the pension pot workers were able to build up ahead of retirement.
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Each year, tax relief on pensions costs the government some £49 billion. The chancellor, Rachel Reeves, was understood to be looking at reducing this figure to help fill a claimed £22 billion in government budgets.
According to Sir Steve, who is now a partner at LCP, the pensions consultants, applying NI to employer contributions would be the easiest option. Others included reducing the tax-free lump sum that could be taken on retirement, or bringing in a single flat rate of relief on employee pension contributions.
Sir Steve said as things stand, employers pay no national insurance on pension contributions. But if raised to the standard rate of 13.8 per cent paid on normal wages above £175 a week, that would raise a gross £24 billion.
Once adjusted for the extra cost it would impose on public sector employers, such as the health service and schools, the net boost to Treasury coffers would be £16 billion. Sir Steve suggested that even a lower national insurance rate for pension contributions, such as two per cent, would raise “a couple of billion”.
Sir Steve told the Times the approach would be attractive to Reeves because it could be introduced quickly, with no immediate impact on employees. He said: “The big advantage for the chancellor is that in most cases this [changes to NI] would have no immediate pay-packet effect on voters, so would have lower political saliency. It could also be implemented relatively quickly."