Budget changes to National Insurance creates new chance to boost your pension

Changes to National Insurance announced in the October Budget could provide workers with an opportunity to boost their pension. Rachel Reeves' biggest single tax hike among the £40 billion in yesterday's fiscal statement is the increase in employer National Insurance contributions from next April.

The rate will increase from 13.8 per cent to 15 per cent while the earnings threshold at which it kicks in will be slashed from £9,100 to £5,000 from April 6, 2025, raising about £25.5billion a year by the end of the forecast period. Small businesses will get some protection, as the Employment Allowance is going up from £5,000 to £10,500 and removing the £100,000 threshold, which means that 865,000 employers will pay no NICs next year, according to the Treasury.

Gary Smith, partner in financial planning and retirement specialist at leading wealth management firm Evelyn Partners said: "This NIC rise is a very significant cost to employers that is likely to have a knock-on effect on hiring and remuneration plans, and could hit job creation and real wage increases.. However, there might be a silver lining in that it will make pension schemes operating on a salary sacrifice basis more attractive to employers – which could mean more employees end up benefitting from them."

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He added: "The Chancellor slightly disingenuously implied her decision not to freeze income tax thresholds further than the current 2028 was something of a rabbit out of the hat. In reality, that was only something floated in the media a couple of weeks ago - income tax thresholds are still frozen and we can only expect meagre increases when that freeze thaws.

"But salary sacrifice pension contributions could help some employees avoid big steps in marginal rates of taxation that occur in the UK salary ladder, for instance by avoiding stepping into the 40 per cent higher rate of taxation at £50,270, or the removal of the personal allowance that starts at £100,000 and can result in a 60-62 per cent marginal tax rate.

"Employers will be looking to reduce costs and as part of this will review their benefit offering to ensure that they are getting value for money. Notably, an opportunity may arise for employers to offset some of this cost through the use of a salary sacrifice pension scheme, including bonus sacrifice, where that’s not already in place."

Salary sacrifice (also known as salary exchange) is a formal arrangement in which an employee gives up part of their salary in exchange for non-cash benefits – which can include waiving some bonus entitlement in favour of a pension contribution. The benefits are not subject to income tax or NICs, so their taxable salary is reduced. Pension contributions via salary sacrifice pensions are a tax-efficient way for employees to pay into a pension scheme and also an attractive option for employers to reduce their NI costs.

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Mr Smith continued: "Salary sacrifice can be a win-win option for both employees and employers, helping employees increase their take-home pay and help employers lower their NICs. However, despite the financial benefits to both the employer and employee, many organisations still do not operate a salary sacrifice arrangement. These employers could look towards salary sacrifice pension schemes to reduce costs.

"Say that the employer currently has a workplace pension scheme set up that is not written on a salary sacrifice basis. The employer would currently pay NI on the full salary of each employee above the lower threshold. Let's say the wage bill was £1m above the lower level, this would make the employer NI bill currently £138,000, now increasing to £150,000 when the NI rate goes up to 15 per cent.

"On a normal workplace pension scheme the employees would pay 5 per cent of salary into the pension, which would be £50k in this example. If the employer converted the scheme to salary sacrifice, this would reduce the wage bill to £950,000 and the NI would reduce to £142,500, a saving to the employer of £7,500."

The Chancellor has acknowledged her decision to raise National Insurance contributions for employers could impact wage growth for private sector workers. Economics experts branded the increase a "tax on working people" which will "definitely" show up in their wages.

Asked about the consequences of the move, the Chancellor told BBC Breakfast: "I said that it will have consequences. It will mean that businesses will have to absorb some of this through profits and it is likely to mean that wage increases might be slightly less than they otherwise would have been."

The Office for Budget Responsibility forecasts that by 2026-27, some 76 per cent of the total cost of the NICs increase will be passed on through lower real wages – a combination of a squeeze on pay rises and increased prices. The measure could also lead to the equivalent of around 50,000 average-hour jobs being lost, the watchdog said.

Ms Reeves later suggested the tax rise was not an easy choice, telling BBC Radio 4’s Today programme: "Look, what alternative was there? We had a £22 billion black hole in the public finances." The Chancellor insisted ministers had "protected the smallest businesses" from the tax hike, and had stood firm on its promise not to raise the key taxes on "working people" – National Insurance, income tax and VAT.

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