Abolish pension tax relief and remove NI relief on employer contributions – Johnson

HM-Treasury-700.pngNICs relief on employer contributions should be stopped saving up to £10.8bn a year, while abolishing tax relief would save the Government £14bn a year says CPS fellow Michael Johnson.

Johnson’s proposals for an overhaul to the pensions system, published to day say the savings to the Treasury from the abolition of NICs relief on employer contributions and on a switch from EET to TEE could be used to fund the 25 per cent bonus on auto-enrolment contributions paid into the Lifetime Isa and a new Workplace Isa for the under 40s.

Johnson’s proposals for a new retirement incentive system call for an end to salary sacrifice, which he describes as unfair as it is not available to the self-employed.

The Chancellor has four options concerning NICs relief says Johnson: do nothing; ban salary sacrifice schemes specifically, saving £2 billion per year; water NICs relief down from 13.8 per cent to perhaps 7 per cent; or end all NICs relief.

Johnson says: “Employers currently receive National Insurance contributions (NICs) relief on their pension contributions of roughly £69 billion, at a total cost to the Treasury of £13.8 billion last year. This figure has two components: £9.5 billion in respect of employer contributions and a consequential £4.3 billion attributed to NICs not collected from employees.

“Buried within this data is the cost of tax foregone as a consequence of employer contributions made through salary sacrifice schemes. Identifying the specific opportunity cost of such schemes is difficult – there is no official data, but it lies between £1.3 billion and £4.1 billion in foregone taxation, with the lower end of the range being the much more likely.

“The annual saving from ending all NICs relief would, however, be less than £13.8 billion. Of the £9.5 billion in respect of employer contributions, £8.1 billion relates to contributions to Defined Benefit (DB)schemes, and roughly 37 per cent of this was in respect of DB scheme deficit repair, i.e. £3 billion. If axing NICs relief, the Chancellor would come under pressure to retain this element of it, so the saving to the Treasury would initially be reduced to £10.8 billion (i.e. £13.8bn less £3bn), a figure which would hopefully rise over time as deficits were reduced.

“This calculation does not, however, take into account that over one third of all employer contributions are made into public service schemes, part of which would be for deficit repair.

If such schemes were to lose their NICs relief cash flow, it would have to be made up from other public sector resources, for no net saving.

“Ending NICs relief would implicitly put an end to the iniquitous salary sacrifice schemes, which are an arbitrage at taxpayers’ expense. Their disappearance is long overdue, not least because they are unavailable to workers without a scheme sponsor, including the 4.5 million self-employed – the fastest growing employment sector.

“Politically, as well as being fiscally attractive, axing NICs relief would be “stealthy”, given that the public at large is oblivious of it. Some employers may object, which prompts some questions concerning employer paternalism: just how real is it today, in what is an increasingly competitive global market?

In addition, is the NICs relief incentive really required, given automatic enrolment? Employers should be reminded of a major quid pro quo: Corporation Tax has been reduced from 28 per cent in 2010 to 20 per cent today, falling to 17 per cent in 2020-21.

“And then there is the fundamental question as to the future of income tax relief on pensions contributions. Scrapping all income tax would save the Treasury some £27 billion per annum. Assuming that pensioner income tax would be scrapped as a quid pro quo, consistent with a TEE framework – pensioners paid £13 billion in income tax last year – this annual saving would fall to £14 billion. Note that any anticipated demographic-led increase in pensioner income tax receipts is likely to be more than offset by a rising tax relief bill driven by auto-enrolment, as well as the rapidly rising Personal Allowance. Some of the net £14 billion annual saving could be redeployed, with NICs relief, as 25 per cent bonus payments into Lifetime and Workplace Isas. This would be consistent with the Government’s four principles behind any reform of tax relief, as detailed in its consultation document. Depending upon the level of the annual contributions cap, there should be sufficient sum over to help reduce the Budget deficit.”