National Insurance Contributions (Employer Pensions Contributions) Bill
Wednesday 17th December 2025
(1 month, 1 week ago)
Commons ChamberNational Insurance Contributions (Employer Pensions Contributions) Bill 2024-26 Read Hansard Text Watch Debate Read Debate Ministerial Extracts
18:45 - The House divided: - Ayes: 312 / Noes: 165 - Question accordingly agreed to.
The Parliamentary Secretary to the Treasury (Torsten Bell)
I beg to move, That the Bill be now read a Second time.
This is a short and simple Bill. It is a stocking filler to yesterday’s Finance Bill. [Interruption.] There are just three clauses for the chuntering Opposition Members to enjoy. They focus on amending the Social Security Contributions and Benefits Act 1992, and they do so to create a power to apply national insurance contributions to salary sacrifice pension contributions above £2,000 a year from April 2029.
I will focus my remarks on three areas: first, why Government action in this regard was inevitable; secondly, the case for the pragmatic, balanced approach that we propose to take; and thirdly, how this sits with wider, crucial questions about pension savings on which the House rightly focuses.
Jim Shannon (Strangford) (DUP)
My intervention will be very brief. The Federation of Small Businesses in Northern Ireland has told me of its concerns about national insurance contributions, but it has also told me that utility prices are up by 52.7%, labour costs by 51.5%, and taxes by 47.2%. I ask the Minister respectfully how he and the Government can expect small businesses to survive increases at that level.
Torsten Bell
I will come to the exact point that the hon. Gentleman raises. The main answer to his question is that we are introducing this change with a very long implementation period—it will not come in until 2029—in order to give businesses and others time to adjust. Businesses have welcomed that across the board, but I will come on to it shortly.
It is always important to keep the effectiveness and value for money of tax reliefs under review; after all, their cost is estimated to be over £500 billion a year. That is always true, but it is especially true when we see the cost explode. That is why we acted in the Budget to reform employee ownership trust capital gains tax relief, because the cost was set to reach more than 20 times what was intended at its introduction.
That is what we see happening in the case of pension salary sacrifice: its cost is on course to almost treble between 2017 and the end of this decade. That would take it to £8 billion a year. For some context, that is the equivalent of the cost of the Royal Air Force. I will repeat that: the cost of pension salary sacrifice was due to rise to the equivalent of our spending, in real terms, on the Royal Air Force. The growth has been fastest among higher earners, with additional rate payers tripling their pension salary sacrifice contributions since 2017. While those on higher salaries are most likely to take part, many others are unable to do so at all.
James Naish (Rushcliffe) (Lab)
I understand the justification for making changes to the salary sacrifice arrangements. The Minister mentions higher earners. Can he explain a bit more about the breakdown of those who are benefiting under the current system as a percentage of the whole? I do not know whether he has that data with him.
Torsten Bell
I will come on to some statistics that might answer my hon. Friend’s question.
While those on the highest salaries are most likely to take part in salary sacrifice, others are completely excluded. This goes to the question from the hon. Member for Strangford (Jim Shannon).
Dr Andrew Murrison (South West Wiltshire) (Con)
Will the Minister give way?
Torsten Bell
I will make some progress before giving way again.
The majority of employers do not offer salary sacrifice at all, including many small businesses. Workers on the national living wage are excluded entirely, and so are the 4.4 million self-employed people across the UK. On grounds of cost and fairness, it is near impossible to defend the status quo.
Of course, a major part of the job of the Opposition is to oppose some things that the Government are doing. I do not want to prejudge the remarks that the shadow Minister, the hon. Member for Wyre Forest (Mark Garnier), will offer shortly, but I am confident that we will hear some opposition—maybe a word or two—to the Bill.
Dr Murrison
I am grateful to the Minister for arguing for more money for the Royal Air Force, and I very much hope that his colleagues in the Ministry of Defence and the Treasury are listening. We were told a little over a year ago that we had wiped the slate clean and that the Government would not be coming back to demand more money to fill various non-existent black holes. What has changed over the past several months that means he is now coming back to levy this very large sum of money?
Torsten Bell
I think I have already answered the right hon. Member’s question: it is important to keep tax reliefs under review. The cost of pension salary sacrifice is growing very fast indeed, so we have reviewed this tax relief and think it is important to bring in pragmatic changes, as I will come on to.
As I was saying, I am confidently looking forward—
Torsten Bell
I am going to make a bit of progress, and then I will give way to the hon. Member.
The truth is that reform was inevitable. Although Conservative Members are not saying it now, they know this is true, because it is what they said in government. In the 2015 summer Budget, they said:
“Salary sacrifice arrangements…are becoming increasingly popular and the cost to the taxpayer is rising”—
[Interruption.] I will come on to what the last Government wanted to do in the pensions space in a second. I am glad that the hon. Member for North Bedfordshire (Richard Fuller) is so keen to hear this; he is setting me up nicely for what is coming in a second.
The summer Budget of 2015 went on to say:
“The government will actively monitor the growth of these schemes and their effect on tax receipts”,
which is the same argument that I just made to the right hon. Member for South West Wiltshire (Dr Murrison). That monitoring led, a year later, to the then Chancellor—now Baron Hammond of Runnymede—announcing benefit-in-kind restrictions. He told this House:
“The majority of employees pay tax on a cash salary, but some are able to sacrifice salary…and pay much lower tax… That is unfair”.—[Official Report, 23 November 2016; Vol. 617, c. 907.]
He was right then, and the same argument holds today.
Former Conservative Ministers should certainly agree, because in government they were planning exactly the kind of change to pensions that we are now introducing. By way of proof, in 2023 the Conservatives commissioned research on restricting salary sacrifice arrangements for pensions, which is exactly the same measure they are opposing today. What was the proposed cap on pension salary sacrifice in that report? It was £2,000 a year, which is exactly the same cap they are opposing today.
Lincoln Jopp
The Minister seems to have co-opted the amount of money spent on the Royal Air Force into his argument. Is he aware that absent the defence investment plan—it was promised in the autumn, and the House rises tomorrow—we have no idea about the size, shape and cost of the Royal Air Force, because the Government are late with their homework?
Torsten Bell
I thank the hon. Gentleman, as I always do, because he always makes interesting points, but my larger point is this: if the Conservative party refuses ever to support any increases in taxation, increases in such spending—I think there is cross-party support for the Ministry of Defence, as the right hon. Member for South West Wiltshire mentioned—cannot be funded and cannot happen.
Almost every tax expert in the country has noted the need for change, and most have called for pension salary sacrifice to be ended entirely. However, we are taking a more pragmatic approach by recognising that change will affect many employers and employees. Our balanced approach has two key parts. The first is time. As I said to the hon. Member for Strangford, nothing will change overnight. We are providing over three years’ notice of the reform’s implementation. What did the previous Government provide to employers? One year’s notice of their reforms to salary sacrifice. This will give everybody involved time to prepare and adjust, which is widely welcomed by firms and business groups. Employers and payroll providers have already been working with His Majesty’s Revenue and Customs to ensure that this change operates in the most effective way, and that process will continue as we approach implementation.
The second key design choice is the cap of £2,000. This cap protects ordinary workers and limits the impact on employers, while ensuring that the system remains fiscally sustainable. The cap means that the majority of those currently using salary sacrifice will be unaffected. It means that almost all—95%—of those earning £30,000 or less, who work disproportionately for small businesses, will be entirely unaffected, and 87% of affected salary sacrifice contributions above the cap are forecast to be made by higher and additional rate taxpayers. This is a pragmatic and fair approach, as well as the fiscally responsible one.
Some will claim—I am sure we will hear this from the Opposition—that salary sacrifice arrangements drive aggregate levels of pension savings. That is simply wrong. After all, salary sacrifice arrangements existed through the 2000s and into the early 2010s, and what happened to pension savings during that period? There were not rises, but big falls in private sector participation in pension savings. The existence of salary sacrifice did nothing to prevent a situation in which, by 2012, only one in three private sector workers were saving into a pension.
What made the difference was not the complicated national insurance reliefs available to some employees, but automatic enrolment, the groundwork for which was laid under the last Labour Government and which was continued by Conservative and Liberal Democrat Ministers. That reversed the collapse in workplace pension saving, and it means that over 22 million workers are now saving each month.
We also see that contributions have risen in line with regulatory requirements, not with the growth of salary sacrifice. Pension salary sacrifice relief doubled between 2019 and 2023. Was that associated with a surge in average pension contribution levels? No, they have remained entirely stable as a proportion of pay, because all the evidence indicates that it is largely automatic enrolment that drives changes in pension savings. That should not surprise anybody, because the research commissioned by the Conservative party that I mentioned earlier pointed in the same direction. It found that the majority of employers reducing their tax bill by offering pension salary sacrifice did not use the savings to increase pension contributions.
More importantly for any member of the public listening—and it is important for all of us to be clear about this throughout this debate—pension saving will remain highly tax-advantaged after these changes. I have seen some deeply misleading comments in the media and otherwise on wider changes to pension tax relief, saying that people will not be saving as much as they previously were. The public should be clear that we are spending over £70 billion per year on pension tax relief, and that will be entirely unaffected by these changes. Employer contributions will continue to be the most tax-advantaged part of the pension tax system, being made entirely national insurance contribution-free.
These are necessary changes that everyone who has thought about this subject knew would be needed, and they are changes being implemented in a pragmatic and balanced way. They are also consistent with the longer-term approach to reforming the pension system that is now in train.
There is cross-party agreement that the work of the Pensions Commission is important as it examines questions of adequacy and fairness. We all know too many people are under-saving. Many commentators have called for higher minimum saving rates within automatic enrolment, including some on the Opposition Front Bench. The commission is crunching the numbers and talking to employers, trade unions and the pensions industry. We should not prejudge its work so I would now simply note that higher savings rates means pension tax relief costs rising further. If we combine that with the reality that if pension salary sacrifice remains unreformed, the end point could be all employee contributions being funnelled through this route, it implies costs at least doubling again to well over £15 billion a year, which means £15 billion in higher taxes elsewhere or cuts to public services. That is the logical conclusion of the arguments from those opposing today’s Bill.
Then we come to the real problem of some groups disproportionately under-saving, which, again, Members on both sides of this House have rightly raised in debates on pensions in recent months. The Pensions Commission is focused on groups we know are most exposed, including low earners, some ethnic minorities, women and the self-employed. This is a real challenge for our pension system but the data is entirely clear that today’s salary sacrifice is not the answer. That is true whichever group we look at. Let us take them in turn. The self-employed are a top concern, with only one in five saving into a pension, but they are entirely excluded from pension salary sacrifice. Low earners are most likely not to be saving, but it is higher earners who are most likely to be using salary sacrifice. And many more women are under-saving for retirement, but many more men use pension salary sacrifice.
These are fair and balanced reforms. They protect ordinary workers, they give employers many years to prepare, and they ensure both our pension system and the public finances are kept on a sustainable footing. Opposing them is not cost-free: the savings from this measure are equivalent to over 250,000 knee and hip operations every year. The truth is that they are inevitable, which is why at least one party opposite was planning to introduce them. I gently suggest to some Members that they can, of course, take the easy route of opposing this change, but the truth is that they will be doing so with their fingers crossed behind their backs, because many know this change needed to come one day, and I suspect not one of the parties opposite will promise to undo it in the years ahead—but we will see.
The Budget delivered badly needed tax reforms ducked for too long by previous Chancellors. Whether it is the pragmatic reform in front of us today or ensuring that everyone driving on the roads contributes to their upkeep, these reforms are what it takes to keep cutting waiting lists, cutting borrowing and cutting energy bills, and I commend them and this Bill to the House.
Mark Garnier (Wyre Forest) (Con)
I have to say that it is a joy to yet again be locking horns with the Pensions Minister on a topic that is important to us all: saving for our retirement. And it is important to note that there are many things that we agree on. We all acknowledge there is an impending issue with pension adequacy: when 50% of savers are projected to miss a retirement income target set by the 2005 Pensions Commission, we agree there is a problem that needs dealing with. We also all acknowledge that UK pension funds are not investing into the UK equity market to the extent that we would all want, although I would caveat that with a fundamental disagreement: on this side, we want to understand the problem; the Minister wants to tell fund managers what they should and should not be doing in terms of where their investment goes. But we also agree with the noble aim of delivering growth in the UK economy, even if the Government are making a little bit of a mess of delivering that aim— growth slowing, inflation up, unemployment up—but we hope they get the hang of it in due course.
But that is why the Chancellor’s Budget is disappointing. For pensioners, she has flown kites about the tax-free lump sum, frozen the personal allowance threshold, and forced millions of pensioners to start paying income tax. Those are her choices. For savers, she has reduced the cash ISA limit to £12,000, scrapped the lifetime ISA for new investors, and increased tax on dividends and savings by two percentage points. Those are her choices. For hard-working people, this Government have reduced real household disposable income, pulled millions more people into paying the higher rate of income tax, and created perverse incentives that make some better off on benefits. These are her choices. So it is no wonder that this Budget has been dubbed the smorgasbord of misery.
It has now got to the stage where our economy has never been taxed so much, and it will get worse. When coming into office, the tax take was 36.4% of GDP. By the time Labour leaves office in four years’ time, it will be 38.2%. It is worth looking at examples of how it is levied. For example, a basic rate taxpayer earning £100 will pay 20% tax, but they will also pay 12% national insurance—an actual tax rate of 32%. Add to that their employer’s contribution, and for a headline basic rate taxpayer on up to £50,000, for each £100 they earn, the taxman takes £47. For a higher rate taxpayer, the marginal rate goes to 57%. The taxman takes more than the employee.
Given the hit to payrolls, both at the employee and employer level, it is no wonder that saving into a pension through salary sacrifice has become popular. Even the Government think it is a brilliant idea, using it for 10% of government employees. It is no wonder, therefore, that people use incentives such as salary sacrifice to make the most of their money, to do the right thing, to save a little bit more, to take responsibility for their futures, and to not rely on the state in their retirement. It is no surprise then that 7.7 million people take advantage of that.
Here we are with something that is popular and that incentivises the right behaviour, and the Government say, “No, we don’t like it.” The Government’s proposal, which we are discussing today, is a tax on 3.3 million people and 290,000 employers—those in the highest levels of pay. How much are they being asked to contribute? How much are we going to whack savers? Some £4.48 billion. That is right—if you do the right thing, if you work and save, this Government will come after you. The Office for Budget Responsibility gets it. It realises—unlike, apparently, the Government—that this will change behaviour and so the tax take drops to £2.6 billion in the second year because people will change their behaviour. Even the Government lose out.
The Government’s contradictions are legion. The financial inclusion strategy, published recently, stated very clearly:
“Our aim is to create a culture in which everyone is supported to build a savings habit, building their financial resilience in the long term.”
A brilliant idea. [Interruption.] Thumbs up from the Pensions Minister! But even after that very clear message, the Government reduced the cash ISA limit, scrapped lifetime ISAs for new investors, and introduced a 2% increase to dividend tax and, the icing on the cake, a £4.8 billion tax on pension savers.
Edward Morello (West Dorset) (LD)
To the hon. Gentleman’s point about changing behaviour, we have already seen reports that two out of five people are less likely to save if the salary sacrifice scheme goes. We have already seen a reduction in contributions because of the cost of living crisis. Are we not just moving the pain somewhere else? Will we not end up with fewer people able to support themselves in old age and it will be back on the state again?
Mark Garnier
Absolutely. The Government are really keen to get people to save for their futures and then they do everything they can to try to stop them doing that. The hon. Gentleman is absolutely right. We are just going to kick another problem down the road. By the way, when the Minister talks about hip replacements and so on, it is savers’ money. It is just that they are taxing them less.
At the same time as the Government look to improve pensions adequacy, they will be taking £4.8 billion from savers and employers. They identify a problem, say they will work to make it better, and then make it worse. Surely, when they were writing the Budget—I know the Pensions Minister has been a significant penholder in that process—they must have seen the extraordinary contradictions in their proposals?
The House would expect me to bang on about this—I am the shadow Minister and that is my job—but let us listen to the verdict from a few experts about the policy we are debating today. Pensions UK stated:
“Any change to salary sacrifice would inject uncertainty into a system that needs long-term trust, not sudden shocks…Introducing a cap would weaken incentives to save when we are facing a generation retiring with inadequate retirement savings.”
The Institute of Chartered Accountants in England and Wales stated:
“This cap will make it more complex for employers to offer a simple and flexible solution for retirement savings.”
The Institute and Faculty of Actuaries stated:
“The decision to impose a £2,000 limit…will undermine current efforts to improve retirement outcomes for individuals. In doing so, the act of saving into a pension will now be more expensive, more complex and less attractive to both employees and employers.”
Evelyn Partners stated:
“Restricting this sensible tax benefit that makes private sector saving more attractive adds insult to injury in a two-tier pension system”.
PwC stated:
“In a bid to bolster the public purse…Budget risks reducing employees’ take-home pay while placing additional pressure on businesses through rising employment costs”.
Hargreaves Lansdown stated:
“Restricting salary sacrifice on pension contribution could cause long-term damage to people’s retirement prospects. We could see employees less likely to increase pension contributions beyond auto-enrolment minimums”.
The Society of Pension Professionals—it goes on and on. Are the Government proud of this rousing endorsement by the industry? It is absurd.
When I was quizzing the Minister about this last week at oral questions—he will remember it well—he proudly held up the report that was commissioned under the previous Government—
Mark Garnier
Indeed—our report, though it was published in May this year. It is a weighty tome. Even its title is pretty dry: “Understanding the attitudes and behaviours of employers towards salary sacrifice for pensions”. The Minister proudly told us that this document underscored the rationale for—[Interruption.] Oh—because it is important stuff. He told us that it underscored the rationale for capping salary sacrifice. However, having read the report, I can tell the House that it actually concludes that:
“All the hypothetical scenarios explored in this research”,
including the £2,000 cap, “were viewed negatively” by those interviewed. The changes would cause confusion, reduce benefits to employees and disincentivise pension savings. The report the Minister is using tells him not to do this.
The report also goes into why salary sacrifice for pensions is used by employers in addition to the incentive of paying into a pension, stating that extra benefits include: savings for employees, so that they have more to spend on essentials, tackling the cost of living crisis; savings for employers, which they can then invest back into their business and staff; and incentives for recruitment and retention. These are all good things—this is the stuff of delivering growth and the basis of creating a savings and investment culture. Why would this Government want to take it away?
The report came to the conclusion that of the three proposed options for change, the £2,000 cap is no more than the least terrible option. [Interruption.] The Minister talks about it being a secret plan—it is a published document. What is he talking about? It is the most extraordinary thing. He refers to it in terms that none of us recognises. But he has brought this in—this is the point. Is the Minister chuffed that his choice comes down to the least worst option for everyone? Here is the truth: it was the Chancellor’s choice to introduce this policy, and this Government are the ones implementing it—they are the ones who are in government.
Let us get to the measures and the impact of the Bill. To be fair, it is a very even Bill; there is something in it for everybody to hate. Take middle-income earners, who are typically in their 30s, and who earn on average a touch under £42,000 a year. This is the target area where the attack on savings starts. This is right at the point in life where people should be doing their very best for their future retirement. It is a perfect target market for the Government’s savings ambitions. However, it does not stop there. In total, at least 3.3 million savers will be affected, which is 44% of all people who use salary sacrifice for their pension. These are all people who work hard—people on whom the Chancellor promised not to raise taxes.
In fact, middle-income employees will be affected more than higher earners. According to the Financial Times, under the Bill, an employee who earns £50,000 and sacrifices 5% of that will pay the same amount in national insurance contributions as an employee on £80,000. If the contribution rate is doubled to 10% of their salary, the disparity grows even further, meaning that an employee earning £50,000 will pay the same amount in national insurance contributions as an employee on £140,000. How is that fair? The Government keep telling us that this policy will affect top earners, but the reality is that those on middle incomes will be disproportionately hit—the very people we should be encouraging to save more.
The Bill will also potentially hit low earners. Somebody who is lucky enough to get a Christmas bonus will not be able to add it to their salary sacrifice, taking advantage of any headroom, because the accounting looks at regular payments, not one-offs. [Interruption.] I am slightly worried, Madam Deputy Speaker, that the pairing Whip has a rather bad cough; I hope he gets better. This will potentially hit the 75% of basic rate taxpayers the cap supposedly protects.
Finally, the Bill hits employers. In the previous Budget, the Government absolutely hammered business. They increased employer national insurance contributions to 15% and, at the same time, reduced the starting threshold to £5,000. Businesses reacted and adapted. They were reassured by the Chancellor’s promise that she would not come back for more, yet here we are discussing further tax rises on businesses.
Let us look at the actual impact this raid on pensions will have on employers. According to the Government’s own impact assessment, it will hit 290,000 employers. A business highlighted in the 2025 report that
“If salary sacrifice were to go away, it would be additional cost of £600,000 to £700,000 per annum to the company in national insurance”.
While the Government are not abolishing it altogether, 44% of people currently using salary sacrifice—[Interruption.] I am worried; the pairing Whip is coughing. Anyway, there is going to be a cost, and that money will be taken away from businesses. This is going to be—[Interruption.] The Minister is chuntering from a sedentary position; he is obviously proud of what he is doing to the pensions industry.
Furthermore, the change will create administrative burdens for employers. With the current system, there are few administrative issues; the only thing that businesses have to bear in mind is ensuring that their employees’ pay does not fall below the national living wage—that is it. So what do the Government do? They go for the most complicated option that the report considered. That was explicitly stated by those involved in the research. As a pensions administration manager for a large manufacturing employer said,
“We’d have to reconfigure all our payroll systems and all our documentation. It would be a big job.”
The National Audit Office estimates that the annual cost on business just to comply with this Government’s tax system is £15.4 billion, yet the Government feel that the time is right to put more costs on businesses. I have to ask, what happened to the Chancellor’s pledge to cut red tape by a quarter?
I think I will move on to my conclusion in order to save people. [Laughter.] There was some great stuff in this speech, but I understand that people want to get away and wrap their Christmas stockings—particularly the Pensions Minister who, like the Grinch, is taking a lot of money away. To conclude, the Government should think again on this policy. People are simply not saving enough for their retirement. We need to do more to encourage them to save for their retirement. I know that the Minister would agree with that, so I hope that he hears the genuine concerns I have raised on behalf of a lot of people. Many people and businesses and are very worried about this policy, and he needs to take it away and think carefully about it.
Fundamentally, we are taking away something that is beneficial to the individual while also being tax efficient for business. Instead of encouraging the creation of incentives such as salary sacrifice or pensions, we are reducing the number. It is the wrong policy, and it sends the wrong message at the wrong time. All it does is add to the ongoing narrative that, “If you work hard to make a decent income, you will lose out. If you work hard as an employer to grow your business, you will lose out. If you try to save towards dignity and retirement, you will lose out.” It is the wrong policy to pursue and we will definitely vote against it tonight.
Madam Deputy Speaker (Caroline Nokes)
I remind Members that the knife will fall at 7 o’clock.
Jim Dickson (Dartford) (Lab)
The Chancellor’s Budget, delivered at the end of November, enables the Government to deliver on the priorities that we set out clearly in our manifesto last year. I pay tribute to the work that the Chancellor and the Ministers on the Front Bench tonight and across the Treasury team have done on that.
As the Minister said, this is a very straightforward Bill. It means that from April 2029, there will be limits to NICs relief that higher earners can take advantage of through salary sacrifice. Importantly, it protects lower earners with a £2,000 threshold. It is always a challenge for any Government to find the right balance in their policies. This change ensures fairness in a system where we could otherwise have seen the costs of salary sacrifice schemes triple between 2017 and the end of the decade. That would undermine vital public service and investment priorities, such as the armed services, the NHS, SEND, our prison system and a vast number of other public services that everyone in this House would want to see properly funded.
The greatest burden in this change is therefore being borne by those with the broadest shoulders. It is right that we have kept our manifesto pledges on tax, and it should only be in the most challenging of circumstances that we step back from those commitments. This change has enabled us to keep those pledges. It is good to see the Government getting on with delivering the change we promised, with inflation coming down; a sixth cut in interest rates coming soon, we hope; gilt prices moving in the right direction; and growth forecast to rise next year.
As a Member of the Treasury Committee, I have not had a chance to speak in the Chamber since the Budget. With your indulgence, Madam Deputy Speaker, I would like to welcome the lifting of the two-child benefit cap. It was clear from the evidence we heard on the Committee that this change will transform thousands of young lives—
Madam Deputy Speaker
Order. I will make exactly the same point I made yesterday. Yesterday’s debate was about the Finance Bill, and this debate is on the National Insurance Contributions (Employer Pensions Contributions) Bill. It is not on the two-child cap or on spending commitments.
Jim Dickson
Thank you for your guidance, Madam Deputy Speaker.
I will conclude simply by saying that when the Chancellor appeared before our Committee last week, she was clear that this was a Budget of necessary and fair choices on tax—of which the Bill is one—so that we can deliver on the public’s priorities of rebuilt public services and fair growth. This change enables us to do that.
Steve Darling (Torbay) (LD)
What we see here is the tune remaining the same from the Budget, but perhaps the words changing a little. We see short-term gain for the taxman and long-term pain for the taxpayer, and particularly for those who wish to save for their pensions.
The Minister was right to highlight how we need to be driving more people to save for their pensions: in fact, we see about 12 million people falling short. Scottish Widows shared a report in the not-too-distant past showing that up to 40% of people are set not to have a comfortable retirement, and the figures have been going in reverse in the last couple of years. The Association of British Insurers highlighted that 40% of people would be less likely to invest in their pensions if these measures were taken forward, so there is a double whammy on those wishing to save. I ask the Government to reflect on the impacts that these measures will have.
The Federation of Small Businesses suggests that a number of small businesses use this mechanism as a way of enhancing their offer to employees in order to retain them. There is a suggestion that there will be higher national insurance costs for some of its members if and when the allowance is withdrawn.
One has to reflect on what businesses have had to suffer. The Ukraine war has led to higher energy bills, the national insurance hike that kicked in in April has put a cold hand around the heart of our businesses and, of course, business rates are set to go up significantly over the next few years. Our economy is in a parlous state. As Liberal Democrats, we really want to see a jump-start for our economy, and we have clear proposals—I will not go over them again for fear of getting in Madam Deputy Speaker’s bad books—for the way forward. We do not want to see our economy go into reverse gear, so we call on the Government to reflect again on these proposals.
Dr Neil Shastri-Hurst (Solihull West and Shirley) (Con)
It strikes me that it should not be particularly controversial that a Government should be encouraging people to save for their retirement, to take responsibility for their future and to feel secure in later life. Therefore, although we are dealing with a short Bill that appears to be purely procedural in nature, its practical consequences are profound, because it takes us in precisely the wrong direction.
Beneath the layer of technical language lies a troubling choice. It is a choice to tax aspiration, penalise prudence and chip away at the very habits that ensure financial security in our later years. The Government have sought to assure us that this only affects high earners and that most will not be affected, but that is not how it will feel to the majority of people in the real world. One in five people—approximately 20%—rely on salary sacrifice. Those are people who are doing the right thing; they are choosing long-term security over short-term consumption. Yet under the Bill, to save means to pay more. That is not positive pension reform; it is a stealth national insurance rise, dressed up in the cloak of technicality.
At a time when businesses are struggling under huge wage bills, regulatory uncertainty and sluggish growth, the Bill quietly imposes on them yet another burden. I remind Government Members that fairness cuts both ways. It is not fair to tell people to save for their future and then tax them more for doing so, it is not fair to talk of fiscal responsibility when penalising prudence, and it is not fair to build long-term public finances on short-term revenue grabs.
There is a moral component to this, because women will be disproportionately affected. Many women, on returning from maternity leave, increase their contributions to cover for that career break. The proposals as drafted will result in those who plan responsibly being encumbered with higher additional national insurance charges.
Torsten Bell
I am reluctant to intervene, but I just want to pick up on two points that the hon. Member has just made. Men are much more likely to use salary sacrifice than women, so I offer him the chance to reconsider his last point about women being disproportionately affected. Before that, he said that the Bill meant that people were being encouraged to save but that they would be penalised if they did so. Given that there are members of the public listening who will make choices about their savings, I invite him to remind everyone that saving into their pension is still a very tax-advantaged thing to do. All Members on both sides of the House should encourage people to save into their pension, as the tax system will continue to do.
Dr Shastri-Hurst
The Minister is right that people should be putting into their pensions and we should encourage them to do so, but we should not put forward legislation that disincentivises that. In respect of women, it is a fact that they are more likely to take career breaks and, by virtue of that, they may want to make up their contributions. This legislation will disadvantage those individuals.
The salary sacrifice scheme has become the bedrock of the modern pension system in the workplace. By decreasing gross pay, it decreases employer national insurance contributions and allows firms to invest more in their people. That is a positive step. My fear is that, as a consequence of this piece of legislation, many employers may scale back those contributions, cut other benefits associated with work or even discontinue schemes entirely. If we want a country that values responsibility and rewards work, and in which people make long-term plans for their economic security, I am afraid that the Bill takes us in entirely the wrong direction.
Graham Leadbitter (Moray West, Nairn and Strathspey) (SNP)
While businesses are still reeling from last year’s national insurance increase, with this Bill the Labour Government are set to increase tax again by making salary sacrifice pension contribution schemes worse for workers.
What has the Labour party said previously? In its 2024 manifesto, on page 79, it stated:
“Our system of state, private, and workplace pensions provide the basis for security in retirement…We will also adopt reforms to workplace pensions to deliver better outcomes for UK savers and pensioners.”
It gets even more ridiculous when we see that the same manifesto also stated on page 21:
“Labour will not increase taxes on working people, which is why we will not increase National Insurance”.
That is exactly what the Bill does.
Recent survey data from the Confederation of British Industry showed that three in four employers will have to decrease pension contributions as a result of the measures in the Bill. As the CBI has said, it is
“‘a tax on doing the right thing’”.
It goes on to state:
“Ultimately, this unwise move will only damage growth, investment and pension saving rates.”
It is not just the CBI that has voiced alarm at the Bill. The Association of British Insurers stated:
“Capping salary sacrifice for pension saving is a short-sighted tax grab which will lower pension saving and undermine people’s retirement security.”
The Minister said in his introduction that
“everyone who has thought about this”
will come to the same conclusion. He might not wish to refer to the CBI and ABI coming to different conclusions, but they have clearly thought about it.
It is not even clear that the measure will raise the money that the Chancellor expects. A former pensions Minister from the coalition era has said that he expects it to raise “a fraction” of the intended amount, as firms will restructure payments to evade it. In addition to the likelihood of payments being restructured, even the OBR has made it clear to the Chancellor that it expects employers simply to pass the cost on to employees through lower wages and less generous schemes. It will be working people who ultimately pay for this short-term thinking, with a lower standard of living and less spending power in their retirement.
As we have seen with the maladministration of pension changes for 1950s-born women, politicians cannot and must not change the goalposts on retirement planning without giving significant advance notice. Any approach otherwise, such as in the Bill, is deeply unfair to savers. This move will land businesses with yet more administrative costs, disproportionately hitting small to medium-sized employers who are still absorbing the increased NIC costs from last year’s Budget. Is this muddled policy really from a Government who stood on a pledge of growing the economy? This is yet again another Budget with another rise in national insurance by Labour.
There are numerous unanswered questions, but the following are top of the list. What assessment has the Minister made of likely behavioural changes to pension savings as a result of this policy? What is the estimated increased cost to businesses as a result of this policy? Does the Minister anticipate lower pensions for workers as a result of this policy, and if so, how much would the decrease be? Can the Labour Government seriously make a commitment in this Chamber not to increase national insurance in next year’s Budget, given the rises in both their Budgets since coming into power? This Bill is deeply flawed and the SNP will not support it today.
Madam Deputy Speaker (Caroline Nokes)
As there are no further Back-Bench contributions, I call the shadow Minister.
Richard Fuller (North Bedfordshire) (Con)
For a Bill that proposes to raise taxation on working people by such a large amount, this has been a remarkably brief debate. But I commend my hon. Friend the Member for Solihull West and Shirley (Dr Shastri-Hurst), who correctly said that this was yet another anti-aspiration measure from this Government, and the hon. Member for Moray West, Nairn and Strathspey (Graham Leadbitter), who made it clear that this was yet another example of Labour breaking its manifesto pledge not to raise taxes on working people. He also asked one of the key questions, which I hope the Minister will address in his reply: as this measure is due to come into force in three years’ time, what assessment have the Government made of behavioural changes, and can the Minister be assured that the amount in the OBR forecast is robust on a dynamic accounting basis?
This is the final economic Bill of the year to be voted on in the House of Commons, and it is another Bill that targets people who are trying to do the right thing. The Bill is a bad measure. It is an anti-savings measure and it is an attack on prudence, so of course the Conservative party will oppose it. This final Bill, at the end of this full-on year of Labour government, leaves me with one fundamental question: why do the Labour Government hate the private sector so much? If you are a family farmer, the Labour Government will snatch your farm away from your children when you die. If you believe in private education, the Labour Government will put up a barrier at the school gate. If you save for your retirement, Labour will tax your every effort to achieve security in retirement. Why do the Labour Government take every opportunity to punish people who are trying to do the right thing?
The Bill makes a mockery of the Government’s own Pensions Commission, set up in July this year, when it wrote:
“Put bluntly, private pension income for individuals retiring in 2050 could be 8% lower than those retiring in 2025—undermining a central measure of societal progress.”
Back in June, the Government recognised the problem of a secure retirement. Now, they are adding to the problem.
I have a question about the numbers. It is interesting that this measure is scored by the OBR in that crucial year of 2029-30 at £4.845 billion, falling the following year to £2.585 billion. That is an important year, because that is when the Chancellor says she has put in all this headroom—how interesting. Does the Minister agree with the director of Willis Towers Watson, one of the world’s biggest advisers on pensions, when he said:
“While earlier introduction would be unwelcome, the change appears to have been timed to maximise revenue in 2029/30—the year that counts for the Chancellor’s fiscal rule. £1.6 billion of revenue in that year is a temporary gain which will be returned to taxpayers who pay employee contributions instead and claim back part of their tax relief”?
On the £4.845 billion—the full amount—is any of that actually a fiction that will be returned the following year, as experts suggest it will be?
The Bill makes it less attractive for employers to contribute to private sector pensions. We all know that there is less certainty in the private sector, because that is where defined contribution schemes predominate, whereas in the public sector, greater certainty is given by a defined benefit scheme. In the public sector, there is also benefit because the contribution from the employer to employee pensions is much higher than in the private sector. In the public sector, employer contributions are equivalent to 27% of earnings, on average, according to research by the Taxpayers’ Alliance, but in the private sector the average contribution is only 8%. Why are the Government proposing to make it harder for private sector employers to contribute to the pensions of their employees? The Bill actively exacerbates the differences. By the way, it does nothing to tackle the unfunded £1.5 trillion liability of unfunded public sector pensions, which will fall on taxpayers.
The Bill is yet another example of the lack of private sector experience on the Government Front Bench. This Government are the least business aware Government in our country’s history. They are taxing and regulating growth out of our economy. Labour Ministers are punishing workers who want to save more for their retirement, and making it harder for their employers to help them to do so. While they can rely on their cushy, gold-plated public sector pensions, private sector workers are worse off.
Madam Deputy Speaker (Caroline Nokes)
Order. Before I call the Minister, I want to put on the record that the behaviour I have seen on both Front Benches this evening has been about the worst I have ever witnessed. The debate should take place across the Dispatch Box, not from a sedentary position. [Interruption.] No—not “He started it!” This is not a classroom.
The Exchequer Secretary to the Treasury (Dan Tomlinson)
Thank you, Madam Deputy Speaker, for bringing the Front Benchers on both sides to heel at just the right time, before I make the closing remarks. It is a pleasure to close this Second Reading debate, and I thank all Members on both sides of the House for their contributions. I thank my hon. Friend the Member for Dartford (Jim Dickson) for his contribution and his brief foray—and it was brief—into broader points around the Budget, which I did appreciate. I will try to minimise doing so in my remarks.
The shadow Minister, the hon. Member for North Bedfordshire (Richard Fuller), raised a few points. While he is whispering over there, I will confirm to him that the costing provided by the OBR accounts for the dynamic effects of this policy. The costing itself has been certified by the OBR. The reason why the change does not come in for a number of years is because it will give businesses time to plan, which we think is an important thing to do when we are making significant changes to the pension system.
This is an important Bill, if small. This is an important debate to have, although it has felt somewhat rushed given that it has come after the many final-week statements and urgent questions today. But that has given me a bit more time to prepare some remarks, which I have hastily cut down from the 30 minutes I was planning; we will see whether we can make faster progress than that for the sake of all concerned.
In my extra time this afternoon, I thought I would attempt to shoehorn a Christmas theme into my closing remarks, given that this will be the last time the House divides before Christmas. Very briefly, I present “The Twelve Numbers of Christmas: the Salary Sacrifice Edition”. I start with 12 words from Baron Hammond of Runnymede on how some employees are, in his words,
“able to sacrifice salary…and pay much lower tax….That is unfair”.—[Official Report, 23 November 2016; Vol. 617, c. 907.]
The Whips can count, and I can see that they have counted that as 12 words—very good. It is clear that even 10 years ago the Conservative party was aware of issues with salary sacrifice schemes. They knew that we must ensure that significant tax reliefs totalling £75 billion a year are properly targeted. That is why we are capping pension salary sacrifice contributions at £2,000.
Let us be clear: we are not removing pension tax relief, just the ability for unlimited relief via salary sacrifice, which many people cannot access in any case. That brings me to my No. 11. Those earning £11, £12 or £13 an hour at the national minimum wage or the national living wage cannot make use of salary sacrifice schemes because if they sacrificed their salary, they would be paid less than the minimum. It is the richest who benefit the most from these schemes.
Chris Vince
It’s Christmas! I have been here the whole time, by the way, Madam Deputy Speaker.
The Minister talks about the impact on different earners. The Parliamentary Secretary to the Treasury mentioned that only one in five self-employed people actually gets a pension, and there was another statistic about low earners. Can the Minister reflect on that? We need to get more people signing up for a pension.
Dan Tomlinson
Some 4.4 million of the self-employed are also not able to save into salary sacrifice schemes; it is right that we make the scheme fairer for all.
Let me continue to run through my numbers. Some 10 million people have signed up to a pension since auto-enrolment, which has limited the need for salary sacrifice. There are more than 900 tax reliefs; this is one of a number that we are reducing to raise revenue fairly at this Budget. Without intervention, salary sacrifice would have cost £8 billion a year by the end of the decade. Instead, we will now raise £7 billion from this change over the course of the scorecard.
The change will affect those on higher earnings more: 60% of the contributions come from the top fifth of employees and just 5% of those earning less than £30,000 will be affected. We will give businesses time to plan—this is not coming in for a bit less than four calendar years.
Dan Tomlinson
We should make progress.
I step back for my final three numbers. Let me briefly set out how some of the long-term decisions the Government are taking are paying off. Figures today show that inflation has fallen to nearly 3%, with wages up more under this Government than in the first decade under the Conservatives. In the past two Budgets, the Government have made the right decisions for the good of the British people. We have focused on improving public services because we know that we were elected to put them right. We have focused on getting living standards up because we were elected to end decline. We have focused on making the right decisions for the long term because we were elected to put to bed the short-term chaos of years gone by.
To conclude, my final number is not a partridge in a pear tree but this fantastic country—my No. 1. We are all here to represent and improve this one great country of ours. It is a land full of hope and wonder, particularly at this time of year, with families and friends looking forward to seeing each other over the coming weeks, neighbours who look out for one another, communities who come together at Christmas—which we all want to get to in good time—and people who work hard and who want the state and the economy to work for them in return.
Although we disagree on much, I know that right hon. and hon. Members from across the House care deeply about this country of ours, and it deserves our best. Although the Bill is short and has only a few clauses, it is part of a bigger story about a Government who love this country and its people and want the best for it, a Government who are making the right decisions for the national interest, and a Government who are working every day to help everyday Brits get a fairer deal, in every way that we can. With that, I commend the Bill to the House.
Question put, That the Bill be now read a Second time.
National Insurance Contributions (Employer Pensions Contributions) Bill
Wednesday 21st January 2026
(1 week, 1 day ago)
Commons ChamberNational Insurance Contributions (Employer Pensions Contributions) Bill 2024-26 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Committee of the whole House Amendments as at 21 January 2026 - (21 Jan 2026)
15:24 - The Committee divided: - Ayes: 191 / Noes: 326 - Question accordingly negatived.
15:39 - The Committee divided: - Ayes: 195 / Noes: 317 - Question accordingly negatived.
16:01 - The House divided: - Ayes: 316 / Noes: 194 - Question accordingly agreed to.
The Second Deputy Chairman of Ways and Means (Caroline Nokes)
I remind Members that, in Committee, Members should not address the Chair as “Deputy Speaker”. Please use our names or “Madam Chair”, “Chair” and “Madam Chairman”.
Clause 1
Employer pensions contributions pursuant to optional remuneration arrangements: Great Britain
Mark Garnier (Wyre Forest) (Con)
I beg to move amendment 5, page 1, line 10, after “income tax” insert—
“at the higher or additional rate”.
This amendment would exempt basic rate taxpayers in England, Wales and Scotland from the £2,000 cap.
The Second Deputy Chairman
With this it will be convenient to discuss the following:
Amendment 7, page 2, line 26, leave out from “as” to end and insert—
“the amount calculated under subsection (5) for a tax year (but subject to any provision made in reliance on subsection (6C)(a) or (b) of that section).
(5) In 2029-30 the contributions limit must be set at a figure equal to £2,000 uprated by any percentage change in the consumer price index between 2026-27 and 2028-29.
(6) In subsequent tax years the contributions limit must be uprated by the same percentage change as that applied to the consumer price index that year.”
This amendment would uprate the £2,000 cap by the percentage change in the consumer price index during the period before 2029-30, and would require the cap to be uprated by the same percentage as the change in the consumer price index each year thereafter.
Clause 1 stand part.
Amendment 6, clause 2, page 2, line 38, after “income tax” insert—
“at the higher or additional rate”.
This amendment would exempt basic rate taxpayers in Northern Ireland from the £2,000 cap.
Amendment 8, page 3, line 39, leave out from “as” to end and insert—
“the amount calculated under subsection (5) for a tax year (but subject to any provision made in reliance on subsection (6C)(a) or (b) of that section).
(5) In 2029-30 the contributions limit must be set at a figure equal to £2,000 uprated by any percentage change in the consumer price index between 2026-27 and 2028-29.
(6) In subsequent tax years the contributions limit must be uprated by the same percentage change as that applied to the consumer price index that year.”
This amendment would uprate the £2,000 cap in Northern Ireland by the percentage change in the consumer price index during the period before 2029-30, and would require the cap to be uprated by the same percentage as the change in the consumer price index each year thereafter.
Clause 2 stand part.
Clause 3 stand part.
New clause 1—Review of impact on SME recruitment and retention—
“(1) The Treasury must, within 12 months of the passing of this Act, lay before Parliament a report assessing the effect of its provisions on small and medium-sized businesses with regard to the—
(a) recruitment of staff, and
(b) retention of staff.
(2) The report under subsection (1) must also consider the cumulative impact of changes to employer’s national insurance on businesses affected by this Act since July 2024.”
This new clause would require the Treasury to review and report on the impact of the Bill’s provisions relating to National Insurance contributions on the ability of SMEs to recruit and retain staff.
New clause 2—Review of impact on small and medium-sized business tax liabilities—
“(1) The Treasury must, within 12 months of the passing of this Act, lay before Parliament a report assessing the effect of its provisions on small and medium-sized businesses with regard to—
(a) businesses’ overall tax burden,
(b) employment costs, and
(c) business solvency.
(2) The report under subsection (1) must also consider the cumulative impact of changes to employer’s national insurance on businesses affected by this Act since July 2024.”
This new clause would require the Treasury to review and report on the impact of the Bill’s provisions relating to National Insurance contributions on the overall tax burden and employment costs faced by SMEs.
New clause 3—Review of impact on employee marginal tax rates—
“(1) The Treasury must, within 12 months of the passing of this Act, lay before Parliament a report assessing the effect of its provisions on the number of employees brought into a higher marginal rate of income tax.
(2) The report under subsection (1) must give particular regard to the impact of the freezing of income tax thresholds between April 2022 and April 2031.”
This new clause would require the Treasury to review and report on the impact of the Bill’s provisions relating to National Insurance contributions on the number of employees who move into a higher tax band due the increase in their taxable income due to the effects of this Bill.
New clause 4—Reviews of the impact of the Act—
“(1) The Treasury must, before March 2029, lay before Parliament an assessment of the impact of the changes made under this Act.
(2) The assessment made under subsection (1) must consider—
(a) the adequacy of pension contributions made by or on behalf of individuals affected by this Act,
(b) use of salary sacrifice schemes and optional remuneration arrangements, and
(c) any effects on the investment capability of UK pension funds.
(3) The Treasury must lay before Parliament a follow-up assessment of the impact of the changes made under this Act before March 2034.”
This new clause would require the Treasury to undertake an impact assessment of the effect of the change made under this Act, before they take effect, and again five years later.
New clause 5—Calculation and publication of lifetime pension values—
“(1) The Treasury must calculate and publish the projected lifetime value of an individual’s pension before and after the changes made by under this Act.
(2) For the purposes of subsection (1), the projected lifetime value is the total amount of pension income an individual is expected to receive over their lifetime.
(3) The calculations made under subsection (1) must—
(a) be based on clearly stated assumptions, and
(b) include illustrative examples covering different pension entitlements.”
New clause 6—Assessment of changes to pension saving through salary sacrifice schemes—
“(1) The Chancellor of the Exchequer must, within 15 months of the provisions of this Act coming into effect, lay before Parliament an assessment of the effect of this Act on the amount saved into pensions through salary sacrifice schemes.
(2) The assessment made under subsection (1) must include an—
(a) estimate of the total amount saved into pensions through salary sacrifice schemes in the 12 months preceding the provisions of this Act coming into effect,
(b) estimate of the total amount saved into pensions through salary sacrifice schemes in the 12 months following the provisions of this Act coming into effect, and
(c) an assessment of the difference between those amounts.”
Mark Garnier
It is a great pleasure to be with you yet again, Ms Nokes. I enjoyed our last sparring with the Pensions Minister just before Christmas, which cheered us up to no end.
Let me speak to amendments 5, 7, 6 and 8 as well as new clause 4, which all stand in my name. It will not surprise the Pensions Minister to hear that we are not at all happy with this Bill, which actually will do nothing to enhance pension savings. I will go through each of our amendments in the reverse order of importance.
New clause 4 would require the Government to assess the impact of the Bill, should it receive Royal Assent, before and after its implementation in 2029. We think it is important that the Government do their homework before implementing policies. We asked for something similar in the Pension Schemes Bill, but the Pensions Minister described it as unnecessary. In this case, the Government seem not to have listened to industry, to experts or to savers. Our new clause asks the Government to do that, so that we can better understand the impact. First, how will the Bill affect pensions adequacy? That will be after the pensions review has concluded, so we do need to know. Secondly, how many people use salary sacrifice or optional remuneration arrangements? Thirdly, what are the investment capability of UK pensions?
There has been a certain amount of commentary on this matter. The Association of British Insurers has said:
“We have consistently raised concerns about the potential impact of a cap on pension salary sacrifice on both people’s savings and employers’ resources.”
There are some issues that are of great concern to many people on this matter, so have the Government fully considered the knock-on effect that it will have on investment from UK pension funds? Also, will the Government update the terms of reference for the pensions commissioner, which is being led by Baroness Drake, to ensure that this is considered?
We are unlikely to press new clause 4 to a vote. However, I believe that the Liberal Democrats’ new clause 5 would have a similar effect. Should the Liberal Democrats wish to move the new clause, we would support it.
Amendments 7 and 8 concern the indexation of the cap. These amendments look to make the £2,000 cap naturally rise in line with the consumer prices index. We have brought these amendments forward because if the cap remains static, it will become increasingly meaningless. We have seen today, when we have had an above-expectation inflation rise of 3.4%, that would clearly devalue the value of the cap, even by the time that it is implemented in 2029. Our amendments seek to address that so that salary sacrifice arrangements do not become redundant without parliamentary intervention. Obviously, we use CPI because it is the basis for inflation. Again, the ABI has made a similar argument, as the cap does not allow for inflationary changes. Having said that, we do not propose to press those amendments.
Let me move on to amendments 5 and 6, which we feel particularly strongly about. They are mirror arrangements for each other. Importantly, we are trying to make what we feel is a very poor Bill into something that is less poor. The amendments would make basic rate taxpayers exempt from the £2,000 cap. They would support the group in the UK that typically under-saves and is the least prepared for retirement. According to the Society of Pension Professionals, a quarter of the people who enjoy salary sacrifice, who will be hit by the changes that this Bill brings in, are basic rate taxpayers. Around 850,000 basic rate taxpayers will be affected by the cap.
More fundamental to that is the fact that this group of people—lower-paid workers—will be hit disproportionately hard. Salary sacrifice allows an employee to give up a certain amount of their salary to be contributed to their pension directly by the employer. We all understand that, but it not only takes advantage of the income tax allowance, as with all pension contributions, but allows national insurance contributions to be included and transferred into the pension, in the case of an employee national insurance, and allows for employer national insurance to be used at the discretion of the employer.
The employee element—the national insurance that we all pay as employees—is the important part of this matter. While higher rate taxpayers will continue to enjoy 40% tax relief at their higher rate, the national insurance is just 2 percentage points—around one-twentieth of the tax break on the income tax. While a basic rate taxpayer enjoys just 20% income tax breaks, their national insurance contribution is 8%. The effect on lower-paid workers is four times that on higher-paid workers. That is not a good thing—indeed, 8% is two-fifths of the value of the other contribution for which they benefit from their income tax savings.
In absolute terms, as I have said, the marginal rate is four times more expensive for lower rate taxpayers than it is for higher rate taxpayers, but there is an even bigger problem: this is a harder attack on other types of savers than we had anticipated. Another group of people affected are those paying back student loans. Graduates pay back their student loans once they pass the thresholds of £28,745, and they do so at a rate of 9%. Graduates who would otherwise enjoy that 9% that goes into student loans being paid into a pension will not see it being paid into their pension because of the salary sacrifice cap. The effective loss for a graduate paying back student loans is 9%. Graduates on the basic rate of tax will see not just a loss of 8% for their national insurance schemes, but a total loss of 17% of the benefit at the marginal level above the £2,000 cap.
The director of the Chartered Institute of Taxation agrees. She said:
“The change will disproportionately affect basic rate taxpayers because they will pay at 8% NIC on contributions over the £2,000 cap, compared with a 2% charge on higher earners. It will also disproportionately impact those with student loans who earn above the repayment threshold, as they will have incurred an extra 9% student loan deduction from their pay.”
At a time when we are trying to get people to do the right thing and save for the future, it seems that the Government want to whack the lower-paid harder. Because of the way that this system works, they will whack the lower paid. They also want to whack a younger generation even harder than those who enjoyed free university education. That younger generation cannot afford to buy a house and have to pay for university education. The Government have made it far harder to get a job, with their jobs tax, and at a time when we are desperately trying to get people to save for their retirement, they are making it harder to save for a pension.
I challenge Labour MPs. Why are they being whipped to vote against these measures and against the interests of lower-paid people? Why are they being asked to vote against the interests of graduates and younger people and vote for a regressive tax?
Jim Shannon (Strangford) (DUP)
I commend the shadow Minister for what he is saying. This is about not just those on lower incomes, but those on middle incomes. It is about the mums and dads of the students—all this falls back on their shoulders. Does he agree that this Bill is an attack on younger people who have aspirations and hopes for the future? We should be encouraging young people and helping them, and the Government have very clearly fallen down on that.
Mark Garnier
I completely agree. That is a fundamental problem. We are doing completely the wrong thing for people who want to do the right thing. We are disincentivising people taking responsibility for their future at a time when the state pension is coming under a lot of pressure. It is expected in 11 or 12 years, I think, that less money will be paid into the pension schemes pot than is withdrawn by those of us who are approaching retirement—I declare an interest, in my own case.
The Parliamentary Secretary to the Treasury (Torsten Bell)
You have years to go.
Mark Garnier
I am trying to finish my speech—in fact, I had finished my speech.
This is a very important point, and we will push amendment 5 to a vote. As I said, we will challenge Labour MPs not to do the wrong thing for their constituents—for the young, hard-working graduates who are desperate to do the right thing.
Charlie Maynard (Witney) (LD)
My chief concern with this Bill is that, like a lot of the measures that the Chancellor announced in the Budget, it looks like it may be a route to some medium-term increased tax revenues, but it gives no thought to longer-term consequences. That will help the Chancellor meet her fiscal rules, but I say “may” because the Bill does not kick in this year, next year, the year after or the year after that; rather conveniently, it will kick in during the election year of 2029-30. That is pretty useful if you are fighting an election and want to meet your fiscal rules, but it is not very useful if you are trying to be fiscally prudent, so that leads to some scepticism about what is actually going on here.
Given the pressures on the state pension and the social care system, it seems extremely counterproductive to reduce the incentives for those who can afford to save more towards their retirement. Let us look at the impact that small businesses have warned about. Pensions UK and the Federation of Small Businesses have jointly expressed their concern that these changes will increase costs for businesses that rely on salary sacrifice to support staff retention and reward. They state:
“Higher National Insurance costs and operational disruption would make it harder to offer competitive benefits, invest in growth, or plan effectively.”
We need to remember the wider context that small businesses are operating in. Even before this Bill, they were battling the sharply rising costs of everything from rents to energy bills, supplies, business rates, the costs of Brexit and so on, and they also have to adjust to the changes in their NICs bills that the Chancellor announced a year ago. One can imagine how that must feel for small business owners—the additional burden heaped on them feels unsustainable.
This Bill is a double whammy on last year’s national insurance hikes—the NICs burden went up last year due to the rate increase, and now this measure is raising their NICs bills for a second time. I would be interested to hear from the Minister what assessment the Government have made of the impact of these changes on businesses, and on small businesses in particular. That is why the Liberal Democrats have tabled amendments requiring the Government to publish full assessments of the impact of the Bill on the recruitment and retention and the tax liabilities of businesses.
Let us now consider the potential damage that this choice will do further down the road by disincentivising saving. Earlier this year, research by Scottish Widows found that 39% of people in the UK are not on track for a minimum lifestyle in retirement, which is a 4% increase since 2023. Research showed that people were actually saving more towards their pension in the last year, but projected retirement income was still failing to keep pace, given the rising cost of living.
Chris Vince
The shadow Minister, the hon. Member for Wyre Forest (Mark Garnier), challenged Labour MPs to champion their constituencies. One of the biggest concerns I have about pensions in my constituency of Harlow is the number of people who are not paying into any pension at all, particularly those who are self-employed or lower earners. Does the Liberal Democrat spokesperson agree that the real conversation that we in this place need to be having about pensions is how we encourage people in my constituency and beyond to save for their futures, which I think is what he is suggesting?
Charlie Maynard
I absolutely agree—well said.
The Government may well say that the Bill will not affect low earners, who are likely not to be saving £2,000 in a given year, as the hon. Member for Harlow (Chris Vince) has just said. However, that is too simplistic a way to look at this issue. The impact assessment by His Majesty’s Revenue and Customs found that an estimated 7.7 million employees currently use salary sacrifice to make pension contributions—that is around 25% of all employees. Of these, 3.3 million sacrifice more than £2,000 of salary or bonuses. That leaves millions of middle earners who are already feeling a significant squeeze as a result of myriad other cost of living pressures, who have had their taxes raised by the previous Conservative Government, and who are now facing an even greater hit due to this Government’s jobs tax and the extension of frozen income tax thresholds. If this Bill discourages those people from putting money away for their safety net in later life, the Treasury will pay the price in the long run.
Before the Budget, the Association of British Insurers warned that two in five Brits will save less in their pension if a cap on salary sacrifice schemes is introduced. With social care budgets also stretched to breaking point, we should be doing everything we can to incentivise people who are able to put money aside for a comfortable and supported retirement to do so. As the Institute of Chartered Accountants in England and Wales pointed out in its response:
“At a time when there is a pensions commission considering the adequacy of pension saving, this demonstrates a lack of joined-up thinking from the government.”
Torsten Bell
I thank the hon. Member for Wyre Forest (Mark Garnier) for the reminder of the excellent debate we had before the Christmas break. I thank him and the hon. Member for Witney (Charlie Maynard) for their contributions. I will briefly reiterate the case for the three short and perfectly formed clauses of this Bill before focusing my remarks on the hon. Members’ amendments.
As hon. Members know, this reform was inevitable. We have had a detailed discussion of the last Government’s secret plan to implement a very similar proposal—the “secret plan” label came from the Conservative party, not Government Front Benchers—and the cost of pensions salary sacrifice was due to almost treble, from £2.8 billion in 2017 to £8 billion by 2030. That is the equivalent of the cost of the Royal Air Force. The status quo is also hard to defend when low earners and the 4.4 million self-employed people across the UK are entirely excluded, reinforcing the point made by my hon. Friend the Member for Harlow (Chris Vince).
Steve Darling (Torbay) (LD)
The Minister will recall our many happy hours together in Committee on the Pension Schemes Bill. One of the issues that the Liberal Democrats raised was the need for an MOT for people as they approach pension age, to see how their pension is going and test its adequacy. Does the Minister accept that putting these stark restrictions in place will significantly restrict the ability of somebody who realises that they are running out of time to make additional contributions to their pension to get to a better place? Would he consider extra flexibility, so that people could perhaps use 10-year allowances in three years?
The Second Deputy Chairman
Order. I remind Members that the scope of this Bill is very narrow indeed, and we really ought not to be bringing in new concepts.
Torsten Bell
Thank you, Ms Nokes. I will follow your advice, but will try to respond to some of the hon. Member’s points when I address the question of how we have gone about making the changes that this Bill introduces.
As I have said, change is inevitable, but it is important to take a pragmatic approach, which is my answer to the hon. Member for Torbay (Steve Darling). The Bill is pragmatic in that it continues to allow £2,000 to be salary sacrificed free of any NICs charge, ensuring that 95% of those earning £30,000 or less will be entirely unaffected. It is pragmatic in that it gives employers and the industry four years to prepare.
Chris Vince
The Minister has said that the cost to the Exchequer of the salary sacrifice scheme is going to triple by the end of this decade. Does he agree that that is unsustainable for the Treasury, and also that we in this Chamber have to get real? The reason why people in my constituency of Harlow cannot even begin to think about pensions or savings is that they are living day to day. What this Government need to do is tackle the cost of living crisis, and that is what they are doing.
Torsten Bell
In a shock move, I entirely agree with my hon. Friend. Members of those parties who have said that they intend to vote against this Bill today cannot keep coming to this Chamber, day after day, calling for additional spending in more areas, while opposing any means of raising taxes. [Interruption.] Well, you have raised the welfare budget, and without trying—
The Second Deputy Chairman
Order. First, I have not raised anything. Secondly, we are not here to debate the welfare budget. This is a very narrow Bill with limited scope. The Minister can listen to the same strictures I have given to other Members.
Torsten Bell
I am listening to every word of your strictures, Ms Nokes. This Bill is also pragmatic by providing time to adjust and by ensuring that saving into a pension remains hugely tax-advantaged. I say gently to Members who do not agree with the detail of this Bill that they should be careful not to give the impression to savers or those not saving that there is not already a strong financial incentive to continue pension saving in exactly the way people have been doing. Clause 1 provides for that pragmatic approach in Great Britain. Clause 2 does the same for Northern Ireland, and clause 3 provides for the territorial extent and start date of these measures.
I will turn more substantively to the amendments tabled by the shadow Minister and the hon. Member for Witney. At one level, I was glad to see amendments 5 and 6 tabled by the shadow Minister, which aim to exempt basic rate taxpayers. It shows the Opposition, as part of the secret plan that I mentioned earlier, accepting the inevitability of change and instead grappling with what the right pragmatic version of that looks like. In many ways, the amendments aim to deliver the same objective as the £2,000 cap, which, as I said, will mean that 95% of those earning less than £30,000 are unaffected, as are the vast majority of basic rate taxpayers.
Sir Ashley Fox (Bridgwater) (Con)
Can the Minister explain what is pragmatic about withdrawing a 2p in the pound tax relief from a higher rate taxpayer without a student loan, while withdrawing a 17p in the pound tax relief from a basic rate taxpayer who happens to have a student loan?
Torsten Bell
The pragmatic approach is to allow people to continue with salary sacrifice up to £2,000 and to not bring in the measure for four years, so that people have time to adjust. Opposition Members will need to justify wanting to spend more than is being spent on the Royal Air Force on that—I sat through Prime Minister’s questions today, and I heard people calling for more defence spending—while not being able to live up to what that requires, which is taking seriously that we spend tax reliefs effectively. For everybody, there will still be a strong tax incentive to save into their pension.
Taking the approach that the Opposition propose, rather than our proposed cap, would likely be impossible to implement in practice and add unnecessary complexity. That is not least because employers would in many cases not know which employees would end up being basic rate taxpayers. They certainly would not know for sure until the end of the financial year, or at least late on into it.
Amendments 7 and 8 would uprate the cap by inflation. The Government have set out our policy intent for a £2,000 cap to be introduced in April 2029, with the timing driven by the desire to give everyone time to adjust. In that context, it does not make sense to index that cap ahead of 2029. Our view is that the future level of the cap in the next decade and beyond is for Budgets in those decades—or at least significantly closer to them. I know that Members are keen to start debating the 2031 Budget, but having heard from Ms Nokes, I think we should leave that for another day.
Our approach is consistent with the one that this House has taken under Governments of all three main parties, which is to have key elements of the pension tax system that are not routinely indexed, including the annual allowance. It is of course right that this and all Governments will want to keep the cap under review to ensure that it continues to meet the objectives we have set out today.
Several of the new clauses probe at the impact of the changes. The Government have published a tax information and impact note alongside the Bill. It sets out the impact of the policy on the Exchequer, the economy and individuals and businesses. It also provides an overview of the equality impacts.
New clauses 1 and 2 focus on SMEs. I have heard suggestions—this has been gently hinted at today—that SMEs are more likely to be affected. The opposite is true. Only 39% of employers offer pension salary sacrifices, and small businesses are less likely to do so than larger businesses. Indeed, the status quo puts SMEs at a disadvantage relative to their larger competitors, which is the opposite of the point that the hon. Member for Witney wanted to make.
New clause 3 focuses on marginal tax rates, but the changes in the Bill do not directly affect a person’s marginal tax. Those wanting to make pension contributions to keep their taxable income below a certain level can continue to do so, and I have read much misleading commentary on that point.
New clause 4 proposes an impact assessment of the changes before they take effect and five years after. I again commend the hon. Member for Wyre Forest, who is showing admirable zeal for supporting the argument that I made on Second Reading that any responsible Government should keep the £500 billion of tax reliefs under review to ensure that they are delivering efficiently on their objectives. That is the exact thought pattern that identified this relief as needing reform. I look forward to the shadow Minister changing his mind and supporting our measures. The Government should and will continue to keep this and all taxes and tax reliefs under review, rather than singling this particular relief out via primary legislation.
I turn briefly to new clauses 5 and 6, which focus on the impact on pension savings. I can reassure the Committee that the Office for Budget Responsibility has set out that it does not expect any material impact on savings as a result of the Budget 2025 tax changes. I hope that these remarks reassure Members on the points that their amendments have raised. I commend the Bill to the Committee.
Question put, That the amendment be made.
Torsten Bell
I beg to move, That the Bill be now read the Third time.
The Bill amends the Social Security Contributions and Benefits Act 1992, creating a power to apply employer and employee national insurance contributions on salary sacrifice pension contributions above £2,000 a year from April 2029. Reform of this type, as I have said, was inevitable. The cost to the Exchequer of salary sacrifice pension schemes was due to almost treble by 2030 without reform. The Government are taking a pragmatic and balanced approach to that reform: first, by introducing a cap so that ordinary workers are, in the vast majority of cases, unaffected; secondly, by giving employers, employees and providers a long lead-in time, so that everybody has plenty of time to prepare; and thirdly, by ensuring that saving into a pension, including via salary sacrifice, remains hugely tax-advantageous. The Government continue to provide over £70 billion of income tax and national insurance relief on pension contributions each year. Employer pension contributions will remain the most tax-advantaged part of the system.
In this debate and others on pensions, we have heard strong cross-party consensus that greater pension adequacy is important. We all look at the forecasts for private pension income and see that they show lower private pension income on average for those retiring in 2050 relative to those retiring today. That is not an acceptable place to be. Answering that question is the job of the Pensions Commission, which we have put in place with cross-party support. It is rightly examining the question of retirement income adequacy and fairness. I gently note that those groups that we all agree are under-saving for retirement, such as low earners and the self-employed, are precluded from using salary sacrifice or are much less likely to use it than other groups.
Part of what we are doing through the Bill is delivering badly needed reforms to the tax system alongside other measures from the Budget. These measures are what it takes to keep waiting lists falling, cut borrowing and cut energy bills in the years ahead. Those who do not wish to support changes like these cannot have it both ways and call for additional spending, additional support on energy bills and the rest.
More generally, it is important that we all consider the effectiveness of tax reliefs in the system, which cost a cumulative £500 billion a year. If we defend the status quo, even in the face of tax reliefs, which are hard to justify and whose costs are rising significantly, that means that higher taxes for everybody else. We are not prepared to see that happen.
Indeed, I am sure that in their hearts the Opposition parties also believe that these reforms are necessary. As a test of that, I invite the shadow Minister to stand up and commit to reversing the changes if—though it is very unlikely—the Conservatives ever happen to form a Government again. I am 100% sure that he will not do that, because he knows that these changes need to be made. On the basis of what should be cross-party support, I commend the Bill to the House.
Mark Garnier (Wyre Forest) (Con)
The Pensions Minister is absolutely right that there is an awful lot that we agree on. It is always a great pleasure to spar with him and agree on certain things, but this Bill is not one of them. Let me be clear why we disagree with the Minister.
First, the contributors to the research done by His Majesty’s Revenue and Customs were absolutely against this Bill. The report, which was published last year and which the Minister mentioned on Second Reading, concluded that all the hypothetical scenarios explored in the research, including the £2,000 cap, were viewed negatively. It also pointed out that the £2,000 cap was the most complicated option presented. Given that the Government tabled no amendments to address the genuine concerns of savers and industry, it seems that the Minister is still apparently chuffed that he is implementing a policy that is, at best, the least worst option for everybody who was asked to comment.
Secondly, the Government are voting for a Bill that will add to the administrative burden on businesses. The pensions system is already incredibly complex for experts to navigate, let alone the general public. That is why salary sacrifice arrangements have been such a popular savings tool for both employees and employers. The principles are easy to understand, with the only real piece of admin being on the employer to ensure that the employee does not fall below the national living wage. But what are the Government doing? They are going for the option that the report considered to be the most complicated.
The Government are choosing to confuse with complications a system that is currently the simplest to deliver. The changes will add an estimated £30 million each year in administrative costs to employers—and this comes at a time when businesses and the wider economy already pay an estimated £15.4 billion just to comply with the tax system. What about the effects on businesses, which see a 15% employer national insurance bonus through helping people to save? The changes will mean that employers will be hit with a 15% increase on the costs of employment.
The savings that employers achieve through salary sacrifice arrangements are often invested back into their employees and their businesses, including through increased pension contributions to all employees, higher wages, or more investment into plant and machinery for growth. That is a good thing. The Government are now taking money away from the productive part of the economy and putting it into other parts. No wonder businesses think that this is a nonsensical policy delivered by a directionless Government, who forget that businesses are the ones that create wealth in our economy, add value to it and drive growth.
Thirdly, the Government are supporting a Bill that will not actually raise the stated revenue. As my hon. Friend the Member for North Bedfordshire (Richard Fuller) pointed out when winding up on Second Reading, the change appears to have been timed to maximise revenue in 2029-30: the year that counts for the Chancellor’s fiscal rules. That is £4.8 billion to fill the Chancellor’s black hole—she will have one by then—in order to make a cynical attempt to stick to a fiscal rule. This is a cynical measure that destroys a lifetime of savings opportunities for just one year of revenue. Frankly, it is also likely that the Government will not raise anywhere near the £4.8 billion budgeted for, as higher earners max out the benefits of the scheme before it comes into force in 2029; and, in any event, people are figuring out a workaround.
Fourthly, the Government are voting for a Bill that harms lower earners the most. As I pointed out earlier, the Society of Pension Professionals estimates that over 850,000 basic rate taxpayers who use salary sacrifice will be affected by the changes, and those 850,000 people will be taxed at a higher rate than their wealthier colleagues—something that the Government apparently seek to target with this policy. And I always thought that Labour Governments were meant to be on the side of working people, Madam Deputy Speaker!
Fifthly, and finally, the Government are voting for a Bill that will make the impending pension adequacy crisis worse. As I said in my introduction, there is widespread agreement that people are not saving enough, so why make the second largest revenue-raising measure of last year’s Budget one that goes after people’s savings for later life? It goes against that basic, important and agreed objective of people planning for their futures. More importantly, it goes against the Government’s own financial inclusion strategy.
As the Economic Secretary to the Treasury set out in November,
“Our aim is to create a culture in which everyone is supported to build a savings habit, building their financial resilience in the long term.”
How does the Bill accomplish that reasonable ambition? It won’t, because it disincentivises employees from saving more in their pensions and it disincentivises employers from providing it as an option in the first place.
Altogether, it is the wrong policy that sends the wrong message at the wrong time. We gave the Government a chance to address some of those concerns earlier, and they did not take it. We hear all those concerns loud and clear from businesses, savers and all the rest of them, which is why we want the Government to think again on this issue and why we will vote against this Bill on Third Reading.
People are simply not saving enough for their retirement. Rather than restricting the options, we should be encouraging the creation of new incentives that encourage people to save more. Instead, the Government are pushing through a Bill that will do the opposite. It is unbelievably unpopular because it punishes 3.3 million people who actively try to save for retirement by punishing the 290,000 employers who incentivise their employees to save. Worst of all, it breaks another of Labour’s manifesto promises: that it will not increase taxes on working people. It remains the wrong policy to pursue, and that is why we will vote against it.
Charlie Maynard
I will let it pass from here.
Question put, That the Bill be now read the Third time.
National Insurance Contributions (Employer Pensions Contributions) Bill
Thursday 22nd January 2026
(1 week ago)
Lords ChamberNational Insurance Contributions (Employer Pensions Contributions) Bill 2024-26 Read Hansard Text Amendment Paper: Committee of the whole House Amendments as at 21 January 2026 - (21 Jan 2026)