The biggest rabbit to emerge from chancellor Rishi Sunak’s hat at this year’s Spring Statement was arguably his commitment to lowering the basic income tax rate from 20 per cent to 19 per cent from April 2024.
The chancellor is currently grappling with a cost of living crisis, and on the same day of the Spring Statement the consumer price index for inflation hit a 30-year high of 6.2 per cent.
The cut to income tax, which represents the first of its kind for 16 years, will yield savings of more than £5bn a year, according to the Treasury.
Specific pensions reform failed to make it into Sunak’s address to parliament, but the tax cut, along with reforms to national insurance and an increase to the national living wage, will have consequences for pensions.
The change could make it more affordable for women to contribute more to their pensionsMelissa Blissett, Barnett WaddinghamA tax cut means a tax relief cut
Taxpayers receive tax relief at the highest rate of income tax that they pay, and basic rate taxpayers currently receive 20 per cent in tax relief from the government on their pension contributions.
A reduction in the level of income tax therefore means that savers will receive lower tax relief on their pensions.
“This means that to get the same retirement income, people will have to pay a little bit more into their pensions,” said Aegon’s head of pensions Kate Smith.
She added that savers may want to consider committing towards their pensions over the next couple of years in order to take advantage of the 20 per cent tax relief.
In September 2021, HM Revenue & Customs released fresh estimates of the cost of tax relief on pension contributions, relating both to income tax and national insurance contributions for the 2019-20 period.
Income tax relief on individuals cost the treasury £7.4bn over the period, while employer contributions cost £26.6bn. National insurance relief cost £19.7bn.
“Strikingly, 78 per cent of income tax relief on contributions relates to the fact that individuals are not taxed upfront on the value of contributions that employers pay into their pensions,” Willis Towers Watson analysis observed, noting that the majority of the associated withdrawal in retirement will be subject to income tax.
“If national insurance relief is included, 86 per cent of relief on contributions relates to money paid into pensions by employers,” the consultancy said.
Good for women and lower earners
Sunak also announced an increase to the national insurance threshold to £12,570 from July 2022, from its current level of £9,880.
The Treasury said this change would enable a “typical employee” to save more than £330 in the year from July.
The decision to lift the threshold was made to help offset the introduction of the health and social care levy, a temporary 1.25 percentage point increase to some classes of national insurance contributions over the 2022-23 period.
Romi Savova, chief executive of PensionBee, estimated that the changes to the national insurance threshold could help savers top up their pensions by £25 a month.
“Over time, an additional monthly contribution of this magnitude could help put another £15,000 in a saver’s pension,” she said.
“New tax cuts such as these can clearly generate additional saving opportunities for pension savers. However, for many people feeling the squeeze, this reprieve will not go far enough.”
The new national insurance threshold will particularly help women, who account for a higher proportion of lower earners, noted Melissa Blissett, senior consultant on pay gap analytics at Barnett Waddingham.
Between October and December 2021, 38 per cent of women in employment were working part-time, compared with 13 per cent of working men, according to the Office for National Statistics.
The increase forms part of changes, including a cut to fuel duty, that “should also help improve the gender pensions gap in the long run”, Blissett said.
“The change could make it more affordable for women to contribute more to their pensions, and will make salary exchange more effective.”
She called for the removal of minimum earnings requirements for automatically enrolled pensions to be introduced at the next Budget, a recommendation that was made in the government’s 2017 auto-enrolment review.
Removing the threshold would increase the number of employees automatically enrolled into schemes, which advocates argue would help lower earners to save for retirement.
Sunak also announced an increase in the national living wage from April for those aged 23 and above, from £8.91 to £9.50 — a move that will widen the scope of auto-enrolment.
The measure will push more savers into the minimum threshold for auto-enrolment — which stands at £10,000 — for those working at least 21 hours a week.
“We would encourage the chancellor and the [Department for Work and Pensions] to go further with auto-enrolment, and in time remove the £10,000 earnings trigger so that people have the option to benefit from pension contributions regardless of income,” said Colin Williams, managing director for pensions and savings at Standard Life.
“The same applies to the current age limit of 21, which we think could be reduced to 18, providing people with a longer time horizon to build their savings.”
Nothing for pensioners
In the run-up to Sunak’s announcement, the government committed to reinstating the triple lock on pensions, which was temporarily abandoned in 2021 as the coronavirus pandemic took its toll on public finances.
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, warned that by lifting the national insurance threshold, “care must be taken that workers earning less than £12,570 per year do not lose access to vital national insurance credits for state pension”.
These credits help savers to maintain their national insurance records when they are not making national insurance contributions.
“The state pension forms the backbone of most people’s retirement, and therefore they should ensure they do not incur gaps unnecessarily that mean they end up with less in retirement,” Morrissey said.
Steven Cameron, pensions director at Aegon, lamented a lack of good news for existing pensioners from Sunak’s announcement, noting that those above state pension age do not pay national insurance on their earnings and therefore will not benefit from the threshold increase.
“There was nothing new in the way of temporary support specifically for this group, and no improvement on the 3.1 per cent increase in the state pension from next month, which is just half the current rate of inflation,” he said.
sally.hickey@ft.com
