Is the government targeting pensions NI as part of Budget tax grab?
Talk about coincidence. Last night, I was having a chat with a couple of industry veterans – talking about possible Budget moves on pensions.
Now it has been announced that pensions minister Torsten Bell will help lead Budget preparations, I wondered if that made it more likely we would have yet more pensions change in the Autumn Budget later this year.
Last week, Professional Pensions reported on four 'lucrative areas' for Budget pension reform – a move on tax-free lump sums, tax relief, salary sacrifice or the annual allowance.
There are some, however, I have missed, as was pointed out to me yesterday evening – notably that no National Insurance (NI) is currently paid on pensions in payment.
This is for two reasons. First, most people stop paying NI contributions (NICs) on their employment income after reaching state pension age and, second, NICs are not levied on passive income, such as income from savings and investments, rental income from property, private pensions, state pensions and other social security benefits.
I thought that, even if you made people pay NICs on employment after reaching state pension age, their pension would be protected as it fell into the category of passive income – and that, surely, would remain exempt.
Then I opened The Times this morning to read that landlords could face NI on rental income in the Budget – with officials examining proposals for applying NI to rental income in the hope of raising £2bn a year.
The article allies of Reeves argued that doing so would not break her red lines because it would involve widening the earnings which NI applies to, rather than raising the rate.
Apparently, a plan to impose NI on rental income (including for pensioner landlords) was proposed last September in the run-up to Reeves' first budget by the Resolution Foundation – the think tank previously headed up by Bell.
The fear is, of course, once the government starts widening the earnings which NI applies to, where will it stop? Could pensions be next in the firing line?
Personally, I suspect putting any NI on pensions in payment, even at a very low rate, will be a political non-starter.
To my mind, levying NI on employers' pension contributions – and the overhaul of salary sacrifice – is the most likely move the government might make (even though it will be seen as yet another attack on employers).
HM Revenue & Customs-commissioned research into salary sacrifice published earlier this year led some to think that the government may seek to make savings by abolishing or reforming salary sacrifice.
The Resolution Foundation agrees this is an area worthy of consideration. In its Revenue and Reform publication last year it said: "There are many options for reforming some of the unfairness in pension tax reliefs, but one of the simplest options is to levy employer NI on employers' pension contributions.
"After reimbursing public sector employers for the additional costs, up to £12bn could be raised by ending this tax break that arbitrarily favours employer pension contributions over worker contributions."
The Resolution Foundation said £3bn of these savings would ideally be used to give full employee NI relief on employee pension contributions – a move it said would particularly benefit basic-rate taxpayers and leave an auto-enrolled worker with typical earnings marginally better off.
While we hope the government won't tinker further with pensions – particularly at a time when the work of the Pensions Commission is ongoing – the money has to come from somewhere.
Jonathan Stapleton is editor of Professional Pensions
