Rachel Reeves has introduced that salary-sacrificed pension contributions above an annual determine of £2,000 are to be topic to nationwide insurance coverage fees.
The transfer, which comes into impact in April 2029, is predicted to boost greater than £4bn in that monetary 12 months.
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The chancellor mentioned the transfer was a “pragmatic step” that will shield these on low and center incomes.
Wage sacrifice schemes for pensions are an association by which workers can selected to surrender a portion of their wage in change for his or her employer paying an equal quantity into their pension.
The a part of the wage that’s given up is at present not topic to revenue tax or nationwide insurance coverage as it’s taken out of a employee’s gross wage earlier than the taxes are calculated.
The schemes additionally profit employers, who wouldn’t have to pay nationwide insurance coverage on the quantity sacrificed by the worker.
Some employers additionally select so as to add this saving to their worker’s pension.
However below the brand new adjustments, contributions above £2,000 will likely be handled as peculiar worker pension contributions, and can subsequently be topic to each employer and worker nationwide insurance coverage contributions.
The chancellor informed the Commons that wage sacrifice for pensions was attributable to “treble in cost from £2.8bn in 2017 to £8bn by 2030”.
She mentioned the “greatest benefit” was going to “higher earners or to those in the financial services sector putting their bonuses into pensions tax-free, while those on the minimum wage or whose employers don’t offer salary sacrifice don’t benefit at all”.
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Ms Reeves mentioned: “This is not sustainable for the public finances, putting pressure on the tax everyone else pays, and so I am introducing a £2,000 cap on salary sacrifice into a pension with contributions above that taxed in the same way as other employee pension contributions.”
She added: “That is a pragmatic step so that people, especially on low and middle incomes, can continue to use salary sacrifice for their pension without paying any more tax than they do now. And to give individuals and employers time to adjust to these new arrangements, these changes will come into effect in 2029.”
The adjustments have been outlined in a doc written by the Workplace for Funds Duty (OBR) and launched in error forward of Ms Reeves’ speech.
The doc mentioned: “The policy results in an increase in NICs (national insurance contributions), which is estimated to raise £4.7bn in 2029/30 and £2.6bn in 2030/31.
“The costing assumes that, generally, worker pension contributions above £2,000 that have been a part of a salary-sacrifice scheme will grow to be topic to employer and worker NICs, both as a result of they transfer to a regular pension scheme or proceed in a salary-sacrifice scheme below the brand new tax preparations.”
The Society of Pensions Professionals (SPP) said around a third of private sector employees use a salary-sacrifice arrangement, compared with almost 10% of public sector workers.
It said that while there was a £4bn cost to the government in providing salary sacrifice arrangements – £1.2bn for employees and £2.9bn for employers – there was also “widespread recognition that this can be a optimistic funding that incentivises pension saving”.
The SPP said the change would affect basic rate taxpayers more than higher rate taxpayers because the main rate of national insurance contributions is 8% for employees, but only 2% on incomes above £50,270.
Steve Hitchiner, chair of the tax group at the SPP, said: “Abolishing wage sacrifice for pensions will have an effect on the take-home pay of thousands and thousands of workers – particularly primary fee taxpayers – and is a tax on working folks, in spirit if not in identify. Additionally it is one other sizeable price to employers and, maybe most significantly, its elimination will scale back pension saving.”
