British households could face cuts in their pension contributions while increases in national insurance are being considered, which is causing great concern among analysts.
Potential Changes to National Insurance Could See Bosses ‘Refuse’ Pension Raises
By Arezki AMIRI
Published on 18 October 2024 13:42
Recent debates over a prospective National Insurance increase suggested by Labour Party Chancellor Rachel Reeves have sparked serious worries about the future of pension contributions in the UK. Analysts fear that this approach may cause firms to “refuse” increases in pension payments for their employees, putting several people's financial security at risk.
The Resolution Foundation, a renowned think tank, predicts that imposing a flat 13.8% National Insurance penalty on employer contributions may earn up to £18 billion per year by the end of the decade. This cash might potentially be used to fund numerous public services and activities.
However, the potential consequences for employees’ retirement savings are concerning. Helen Morrissey, head of Retirement Analysis at Hargreaves Lansdown, emphasized the implications of this potential change, stating that “employer national insurance could be levied on workplace pension contributions.”
National Insurance Considerations
Currently, employers are required to pay National Insurance contributions of 13.8 percent on earnings exceeding £175 per week, excluding pension contributions. This exclusion has been a significant incentive for employers to contribute to their employees' retirement plans.
Morrissey claims that the Chancellor is now looking at this business incentive, increasing the likelihood that the government would seek to extend the tax base by include worker pensions in National Insurance calculations.
Concerns About Employer Reactions
However, the financial consequences of such a strategy may be far-reaching. Higher employer expenditures may result in lower pay increases or, in a worst-case situation, a stop in the growing pension contributions.
Morrissey remarked, “Given the ongoing debate around adequacy and how we can help people better prepare for retirement, this could be a backward step”. The prospect of employers prioritizing their financial stability over their employees' retirement savings could create a significant gap in the retirement readiness of the workforce.
Moreover, this situation could exacerbate the existing challenges many faces in saving adequately for retirement. With the cost of living rising, this potential policy change could further stress household budgets, compelling workers to consider withdrawing funds from their pensions or delaying retirement altogether.
Government's Stance
A spokesperson for the British government responded to the speculation by saying, “We do not comment on speculation around tax changes outside fiscal events”. Morrissey also highlighted previous alterations to tax-free cash allowances, which were reduced to a maximum of £268,275 by the last government.
Many are now grappling with the implications of withdrawing from their pension plans prematurely, as doing so could lead to a loss of future investment growth and expose them to various taxes, including inheritance, capital gains, and dividend tax.