IFS wants NI on pensions in payment and contributions

The IFS (Institute for Fiscal Studies) has proposed charging employers National Insurance on their pension contributions or restricting tax-free cash, both with a view to raising revenue for the Treasury.

The IFS’s Green Budget 2014 says charging NI on pension contributions would save the Treasury £10.8 billion a year. The paper says is therefore a powerful case for introducing a cash limit on the amount that can be taken as a tax-free lump sum, at a level considerably below the £312,500 that is a quarter of the incoming lifetime allowance.

The paper says reducing the annual or lifetime allowance or restricting income tax relief on pension contributions in any other way would be expensive to administer and would ‘inappropriately distort behaviour’. It says better ways to boost revenues to the Treasury would be to tackle the two elements of the system the IFS sees as generous – the tax-free lump sum and the ‘generous’ NI treatment of employer pension contributions. The paper says ‘charging NI on employer contributions would be a major improvement on the current system’. It also suggests charging NI on pensions in payment, on a graduated basis, to take account of intergenerational fairness, claiming each 1 per cent NI added to pensioner income would raise £350m a year.

Hargreaves Lansdown says such a proposal would end up meaning employers would have to pay £11 billion in tax, tipping the balance towards salary over pensions in many cases. The adviser predicts some employers would level down to auto-enrolment minimum pension contributions, leading to lower staff pensions.

Hargreaves Lansdown head of corporate research Laith Khalaf says: “While there may be great savings to be had for the Treasury, the effect on the UK pension system would be calamitous. Not to mention the cost to employers, who are currently implementing the government’s auto-enrolment programme at a cost of around £4 billion a year.

“Employers are already footing the bill for auto-enrolment, while trying to keep their heads above water in a difficult economy. Many already do much more than their legal obligations in providing pensions for their staff, hitting them with an £11 billion tax bill would make them seriously question why they are doing this.’

“Employers do not currently have to pay National Insurance on pension contributions, unlike salary, and this is an important saving for UK employers who choose to pay into pensions for their staff. Getting rid of this relief would have dire consequences.”

 The IFS Paper says –  

‘A pension contribution that costs an employer £100 to make would cost him nearly £130 if it came instead from an employee earning below the upper earnings limit. This no doubt helps to explain why HMRC records income tax relief on employer contributions as more than three times as great as that on employee contributions.  The obvious solution would be to start charging NICs on employer pension contributions, so that they are treated like any other form of remuneration.’