Currently, employers have to make a minimum 1 per cent contribution to their employees’ pension, under automatic enrolment rules.
These payments are exempted from paying national insurance under legislation published in 2006.
According to Office for National Statistics (ONS) data, this exemption is believed to have had a cost for the government of £15.7bn in 2015 to 2016, the greatest amount in the last 16 years as the number of people signed up to their workplace pension due to automatic enrolment has increased.
Sir Steve Webb, director of policy at Royal London, told FTAdviser that ending this national insurance exemption on contributions could be a way of getting some of the tax relief money back.
He said: “If they apply a 1 per cent rate [of national insurance tax on employers' pension contributions] or similar, they can get serious money out of it”.
He added: “I know for a fact that this has been discussed by the [HM] Treasury”.
A HM Treasury spokesperson declined to comment on this matter.
This measure could be applied together with other cuts on tax relief, such as reducing the annual allowances.
Overall, the government's tax relief bill is increasing – besides the relief on employers’ contributions, the remaining measures that allow employees to get back some of the tax charged on occupational schemes or personal pensions accounted for £38.2bn in 2015 in 2016.
This is an increase of £3.3bn when compared to the previous fiscal year.
Jon Greer, head of retirement policy at Old Mutual Wealth, agreed that axing the national insurance exemption was an option on the table, as the tax relief will “continue to go up as minimum contribution rates under auto-enrolment increase in 2018 and 2019”.
From April 2018, companies will have to pay 2 per cent into occupational pension schemes, which will increase to 3 per cent a year later.
A total of £17bn a year will be going into workplace pensions by 2019 to 2020 as a result of auto-enrolment, according to the Department for Work & Pensions (DWP).
But cutting this exemption would mean an increased burden on UK companies, Mr Greer warned.
He said: “Cutting this relief would heap additional cost on corporates, by stripping away the relief they get on national insurance of up to 13.8 per cent when paid into a staff pension.
“But it would reduce the cost of pension tax relief without hitting employees directly.”
Mr Greer said that, however, before implementing such a radical option, chancellor Philip Hammond “needs to think about the impact on businesses in the UK”.
He said: “The Conservatives have already promised that the UK is open for business, a promise of particular importance as Brexit negotiations tick along.”
On the opposite side is Jamie Jenkins, head of pensions strategy at Standard Life, who argued that such a move to pull back on tax relief for employers contributing to pensions would be a complicated process.
He said: “A change in employers’ national insurance contributions falls into a bracket of a wider tax review, and there is no appetite for a complete change in tax relief."
He also added that employees that pay into pensions through salary sacrifice would be affected by such a change.
In this option, the employee can give up part of their salary, which the employer then pays into the pension, along with their contribution to the scheme.
Kusal Ariyawansa, a chartered financial planner at Manchester-based Appleton Gerrard, is against changes to the current pension tax relief model, since “the savings rate is at an all-time low” and “many struggle to save for retirement”.
He said: “I can only agree to [charge] national insurance on employer pension contributions where salary sacrifice is the facilitator of avoidance.
“With auto-enrolment evolving, imposing an additional tax on all employer contributions would add extra strain to small and medium-sized enterprises (SMEs) and further decrease the efficiency of savings.”
maria.espadinha@ft.com
