National Insurance Contributions (Employer Pensions Contributions) Bill

Lord Altrincham Excerpts

2nd reading
Wednesday 4th February 2026 Lords Chamber

[Lord Altrincham (Con)]

I thank the Minister for leading this debate and for his customary courtesy in listening to all the observations of noble Lords. There is a common observation that there is nothing new in tax. Maybe this Bill is a small Bill; the noble Lord, Lord Davies, says it is a trivial matter that does not really need our scrutiny. Nevertheless, it is a moment in taxation when we are taxing savings—

[Lord Davies of Brixton (Lab)]

I actually said that I was looking forward to discussing it further in Committee. It certainly does require our attention.

[Lord Altrincham (Con)]

I stand corrected.

This is a moment in taxation when we move towards taxing savings. It is against a backdrop in which policy has been relatively settled in this area in recent years. There was an understanding that we need to provide private sector pensions. Quite broadly, there was cross-party support for auto-enrolment; it has been quite successful. Against this background of a degree of consensus, we are now introducing—in a small but nevertheless important way—the taxation of savings. We made the changes towards auto-enrolment not just for social benefit reasons but to protect the state. It is important to remember that we are doing this also because the liability for retirement is falling on the state, and it became urgent to do something about this and to make sure that there was private provision to offset this rising cost.

With this Bill, we find ourselves at a moment when the tax system begins to eat itself. It would be illusory to suggest that there will be any gains from taxing savings, because the liability that will accrue to the state will likely be greater. That is because the returns to invested pensions over time will, in almost all cases, exceed the growth of the state, as the noble Lord, Lord Davies, knows from his time in pensions, and it is the growth of the state that provides the tax income that can support people. So the gap will be very wide if people do not save in private sector pensions.

That is the unfunded liability that stands behind this tax change. That liability could be very wide for the cohorts who are affected by this: middle-income earners who might have 30 more years of saving. Quite small amounts accumulating over 30 years can make an enormous difference to their retirement: it is enormously important. But, in the absence of those savings, regrettably, the state will be exposed. Therefore, the Government need to tread very carefully when making these changes, because the credit of the Government rests on securing some stability to future liabilities. Growth in this area of future liability is extremely important for investors in our bond market, and we need to make sure that they do not feel that there is a rebalancing here towards current taxation income against liabilities in the future.

I turn to the themes that have been raised so far, starting with fairness. As my noble friend Lady Neville-Rolfe explained, the Bill is, in practice, aimed not at higher earners but at earners around the middle of the income distribution. Among this group will be a large number of younger workers, already taxed quite heavily, and among them graduates required to repay the student loan. This initiative is a quite specific transfer from the young to the old. These groups are being encouraged to behave responsibly—as the noble Lord, Lord Londesborough, mentioned—and to put aside savings.

For employees, the Bill raises fundamental questions of fairness and coherence. Two individuals may arrive at precisely the same level of pension saving yet be treated very differently for national insurance purposes, depending solely on how that saving is structured. Direct employer contributions remain exempt, while salary-sacrificed contributions above the threshold do not. This difference undermines neutrality in the tax system and distorts incentives away from arrangements that many workers actively rely on to manage affordability and long-term planning.

Quite a few noble Lords mentioned complexity. We should also consider the burden on employers, particularly those operating within tight margins and employing large workforces. Professional advisers in the pensions and benefits sector have warned that increased payroll costs and added administrative complexity may prompt businesses to reconsider pension enhancements and lead to a contraction of workplace pension ambition itself. That was mentioned by my noble friend Lady Altmann.

Businesses that have structured remuneration packages in good faith around existing rules now face not only higher contribution costs but a new layer of administrative complexity. The introduction of a £2,000 cliff edge creates a compliance burden that is wholly disproportionate to the revenue that it is said to raise. For many firms, this is a material increase in payroll expenditure. There is good evidence that employer costs could account for a substantial share of the projected yield.

We have already seen the dampening effect of recent national insurance increases on recruitment and wage growth. To compound that pressure risks discouraging the forms of workplace pension generosity that public policy has long sought to encourage.

The distributional effects further complicate matters. For those earning above the higher earnings threshold, portions of what is, in essence, deferred income are drawn back into the national insurance net at marginal rates aligned with current earnings. The result is a reclassification of pension saving itself. Contributions made today attract national insurance, while withdrawals in retirement continue to attract income tax. Although these are different fiscal instruments, the policy makes pension saving resemble present consumption rather than deferred provision, creating the perception and often the reality of taxation both on entry and exit. This matters because the architecture of pension policy rests upon encouraging individuals to defer consumption, to assume responsibility for the later years. The messaging around this is sensitive, as my noble friend Lord Leigh mentioned.

The Government keep changing pension policy, so we might expect taxpayers to become better at adjusting behaviour. In this case, we have heard that some employers are encouraging employees to increase salary sacrifice now, which will of course reduce tax receipts in the short term and may reduce student loan repayments. The younger cohorts have learned to adjust their student loan repayments using the salary sacrifice scheme. Taxpayers may be hoping for a policy change later and would be rational in expecting some adjustment here, particularly for graduates. Given this uncertainty, we are asking for an independent assessment of the policy.

We have already witnessed the economic cost of uncertainty generated by repeated speculation and late clarification in fiscal policy. To proceed now with a measure that introduces fresh complexity and perceived inequity risks compounding that loss of confidence at precisely the moment long-term saving most requires reassurance.

National Insurance Contributions (Employer Pensions Contributions) Bill

Lord Altrincham Excerpts

Committee stage
Tuesday 24th February 2026 Grand Committee

Moved by

[Lord Altrincham]

6: Clause 1, page 2, line 26, leave out “£2,000” and insert “the amount calculated under subsections (5) and (6)”
Member’s explanatory statement
This amendment and another in the name of Baroness Neville-Rolfe 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 in Great Britain.

[Lord Altrincham (Con)]

I thank the Minister for his customary courtesy in hosting our Committee and for his patience with us as we move to group 3. I will open on this group, which is on contribution limits and indexation, and comment on those after the Division.

--- Later in debate ---

[Lord Altrincham (Con)]

I thank noble Lords for their patience. I will resume the opening of group 3, on contribution limits and indexation, and will comment on Amendments 6, 13, 19 and 25 in my name and that of my noble friend Lady Neville-Rolfe. We also have a wide range of other amendments, many of which speak to the same set of concerns. I will not address the other amendments in this group in great detail, therefore, but I want to note that I am glad that the same issue has been largely echoed not only on this side of the Committee but across it.

We have already debated the principle of whether this measure is wise, but even those who are broadly sympathetic to the Government’s intentions ought to look carefully at what will happen if the £2,000 cap is left to stand unindexed year after year. The answer is that the Government will end up taxing people twice: once through the cap itself, and again through the quiet, insidious effects of inflation. The Government have chosen £2,000 as their figure. Let us take them at their word that this is intended to protect those on low and middle incomes while bearing down on very high earners; that is what the Minister has told us, in effect, and we should judge the policy against its stated purpose.

The problem is this: a cap that is not uprated in line with inflation does not stay in the same place. It moves, and in one direction only, pulling more and more people into its reach as wages and prices rise while the threshold stays frozen. We have seen this story before in our tax system. We know precisely how it ends. Fiscal drag, by any other name, is still fiscal drag, and, when it operates on a cap that limits pension saving, it is particularly harmful.

Consider an employee today contributing 5% or 6% of a salary that sits just at or above the threshold. Over three years of even modest inflation before the cap comes into force in 2029, then year after year thereafter, that same real-terms contribution will be clipped a little further each time. The worker has not become richer in any meaningful sense. They have simply been caught by a fixed line in the sand that the Government have chosen not to move. A number of different options set out in this group could mitigate this, such as raising the cap by different amounts or applying a percentage. I would like to hear from the Minister what impact these would have. For now, I believe that our amendment on uprating by CPI is the most realistic, but all have some attraction.

Given the complexities of administration already discussed—and apparently reflected in compliance costs in the years running up to the introduction of this new regressive tax—there may be a case here for providing for sensible indexation from day one. When we reformed salary sacrifice in government, we decided to continue it uncapped for pension purposes for a very good reason: we need to incentivise people to pay into their pensions to improve retirement adequacy and, indeed, to build a habit of saving. Sadly, the Bill goes in the opposite direction.

I appreciate that pensions adequacy will be debated more fully later on in our proceedings, but it is too important not to be addressed at this stage. If an increasing number of people find themselves caught by a cap as they sacrifice what are, in real terms, ever more modest sums through salary sacrifice, the inevitable consequence will be a reduction in retirement saving, affecting, as we have already discussed in Committee, people on modest earnings or, as the noble Lord, Lord Londesborough, mentioned, the cohorts over £25,000. Absent any uprating mechanism, the policy will steadily draw in those on lower and middle incomes, penalising individuals, in effect, for doing the responsible thing and saving for their retirement. As we made clear at Second Reading, improving retirement adequacy ought to be a central objective of government policy, not something undermined by it.

We must also be candid about the long-term implications. When people save less today, the shortfall does not disappear; it re-emerges later as a greater pressure on the state and, ultimately, on future taxpayers. I remain unconvinced that the Treasury has properly grappled with these behavioural and fiscal consequences, and the increasing cost of unfunded future retirement liabilities. The Government are taking significant risk with long-term savings behaviour by making even marginal changes, as was noted by my noble friend Baroness Altmann, or the expected behavioural changes by employees and employers noted by the OBR. I look forward to the contributions from other noble Lords with amendments in this group and the response from the Minister. I beg to move.

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[Lord Livermore (Lab)]

My Lords, I am grateful to noble Lords who have spoken in this debate.

First, I will address Amendments 6, 10, 11, 13, 19, 22, 23 and 25 in the names of by the noble Baronesses, Lady Neville-Rolfe and Lady Kramer, and the noble Lords, Lord Altrincham and Lord Londesborough. These amendments seek to uprate the cap by the percentage change in the consumer prices index or the retail prices index. The Government agree on the need to keep the level of the cap under review to ensure that it continues to meet its policy objective: keeping the cost of salary sacrifice tax reliefs on a fiscally sustainable footing while protecting ordinary workers. However, we disagree with the approach set out in these amendments because it would be inconsistent with the approach taken in respect of other pension tax reliefs, which are not routinely indexed with inflation.

For example, in 2023, when the previous Government made changes to the annual allowance, they increased it by a set amount rather than indexing it; the annual allowance was otherwise not routinely uprated or index-linked. The Government are taking a pragmatic, balanced approach to ensuring that the cost of tax relief on salary sacrifice pension contributions remains fiscally sustainable. The future level of the cap in the next decade and beyond is for future Budgets in those decades.

This leads me on to Amendments 7 to 9, 20 and 21 in the names of the noble Baronesses, Lady Neville-Rolfe, Lady Kramer and Lady Altmann, and the noble Lords, Lord de Clifford and Lord Londesborough. These amendments seek to increase the cap beyond £2,000. It is important to consider the level of the cap in the wider context of the objectives of this change, which are about keeping the tax system on a sustainable footing while protecting ordinary workers. Without reform, the cost of this tax relief is now set to almost treble in cost, from £2.8 billion to £8 billion, with the vast majority of the benefit going to higher earners because around 62% of salary sacrifice contributions come from the top 20% of earners. Although some tax experts have called for pension salary sacrifice to be abolished entirely, the Government are taking a more measured and pragmatic approach.

As I said earlier this afternoon, the £2,000 cap protects 74% of basic rate taxpayers using salary sacrifice. This means that three-quarters of those earning up to £50,270 a year who use salary sacrifice will be protected by the cap. Almost all—95%—of those earning £30,000 or less who use salary sacrifice will be entirely unaffected by the changes. Some 87% of salary sacrifice contributions above the cap are forecast to be made by higher and additional rate taxpayers. Increasing the level of the cap in the way proposed by these amendments would cost additional money and would undermine the objective of putting this tax relief on a sustainable footing for the future. Such changes should also be considered in the wider context of pension tax relief, which amounts to more than £70 billion each year; that spend will be entirely unaffected by this legislation.

In the light of the points I have made, I respectfully ask noble Lords to withdraw or not press their amendments.

[Lord Altrincham (Con)]

My Lords, as many noble Lords have made clear in their remarks on this group, the policy as currently drafted operates as a rather untargeted tax. Introducing indexation by RPI or CPI—described by the noble Baroness, Lady Kramer, as the goose and gander amendment—would be a straightforward and proportionate step that the Government could take now to mitigate what I can only assume is an unintended consequence. We on these Benches would also support the higher limits proposed by noble Lords and noble Baronesses today to mitigate behavioural changes that may undermine the objectives of this initiative or the Bill entirely.

The Minister has heard a range of constructive proposals this afternoon as to how this issue might be addressed. I very much hope he has listened carefully to the strength of feeling across the Committee and that he will give serious consideration to adopting one of these solutions. I beg to withdraw the amendment.

Amendment 6 withdrawn.

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[Baroness Kramer (LD)]

My Lords, I will try to be speedy. The amendments in this group in various ways would require that the work to assess the impact of the Bill on pension savings and pension incomes is done and put before Parliament. My Amendment 28 would make this a responsibility of the Government. Amendments 29 and 30 in the names of the noble Baronesses, Lady Altmann and Lady Neville-Rolfe, would require an independent review. These three amendments have different degrees of detail and emphasis, but I suspect they can easily be redrafted to cover all the key elements.

It seems to me that behind all these amendments sits a basic question: did the Government do their homework? If they had, they could pretty much hand us everything we have requested tomorrow morning. I fear that this has been another off-the-hoof policy where the Government poorly understand the consequences, and I think that needs to be exposed and dealt with. It is true that implementation of the policy is not until 2029, probably the other side of another general election, but, frankly, that is not an excuse for doing this wrong, for not having the evidence and for not making it available. That is what I think every amendment in this group seeks to achieve in a different way. I beg to move.

[Lord Altrincham (Con)]

My Lords, Amendment 30 has a simple purpose: to ensure that before the Act is commenced there is an independent review of its impact on pensions adequacy—which we have been talking about again and again through this Committee—saving behaviour and on those repaying student loans, and that Parliament must see the findings before the provisions take effect.

Pensions adequacy is one of the central long-term economic challenges facing this country, and under the Government it is set to get far worse. The Institute for Fiscal Studies’ report Adequacy of Future Retirement Incomes: New Evidence for Private Sector Employees could not be clearer. On current trends, around four in 10 private sector employees saving into defined contribution schemes are projected to undershoot the Pension Commission’s replacement rate targets. Even using a far more modest minimum living standard benchmark, a substantial minority are not on track to reach it.

The IFS also makes a crucial point that, since the Pensions Commission report 20 years ago, lower returns on saving and longer life expectancy mean that the savings rates required to hit adequacy benchmarks are higher than previously thought. In other words, the adequacy challenge has intensified, not diminished. Yet what are the Government doing in the Bill? They are altering one of the key mechanisms through which many working people build their retirement savings without any independent assessment of what that will mean for adequacy.