Warning over Rachel Reeves' National Insurance worker pension 'tax on jobs'

Business chiefs have warned the Chancellor Rachel Reeves against putting National Insurance on employer contributions to staff pensions.

Comments from the Prime Minister Sir Keir Starmer and other members of the Cabinet suggest that requiring employers to pay NI on pension contributions is a virtual certainty in the Budget on October 30.

However, business leaders have warned that this will effectively create a new “tax on jobs”, which would make businesses less likely to take on new staff.

There are also concerns that businesses will reduce the amount of money they contribute to staff pension pots to the legal minimum to offset the introduction of NI, which would put up payments by 13.8 percent.

Levying NI on employer pension contributions could raise up to £18 billion a year by the end of the decade, according to recent research by the Resolution Foundation think tank.

However, City figures such as the chief executive of Lloyds Bank, Britain’s biggest lender, said NI would be one of the “worst taxes” to increase because it would be a “handbrake” on investment and hammer businesses by making it more expensive to hire staff.

Charlie Nunn, the Lloyds Bank chief executive, said: “Anything that helps people continue to invest and take appropriate risk, we think, is really important. Anything that does the opposite would be a handbrake.

“Pensions, and contributions to pensions, are critical. We see about 40 per cent of people in the UK have a pension which won’t give them even a basic living allowance when they retire. So we need to increase enrolment and investments in pensions.”

Kate Nicholls, the chief executive of UK Hospitality, said: “This is a tax on jobs. An increase in NICs makes it harder to employ people and to take a risk on recruitment and expansion, because the costs of it will be so much higher.”

Lord Spencer, the billionaire investor, and a Tory donor accused Labour of breaking its promise not to tax working people.

He told the Telegraph: “It’s a breach of the principle of their commitment not to change income tax rates. They said they weren’t going to change National Insurance and they’re now redefining it and saying they weren’t referring to corporate National Insurance.”

Lord Clarke, the former Tory chancellor, said both Labour and the Tories had been “irresponsible” at the general election to promise “not to put up any of the normal sources of tax revenue”.

He said: “By ruling out raising any of the basic taxes that are normal and fair ways of raising tax, they are now having to look at some of these unattractive alternatives. Raising National Insurance will have an adverse effect on employers creating jobs and affect the financial position of companies.”

Labour promised not to raise NI on ‘working people’ in its general election manifesto. Party insiders say there was no such promise not to raise the NI paid by employers.

Sir Steve Webb, former Liberal Democrat pensions minister, published a report last month for the pensions consultancy LCP, predicting Reeves would levy NI on employer pension contributions.

Sir Steve, who is now a partner at LCP, the pensions consultants, said: “The big advantage for the chancellor is that in most cases this would have no immediate pay-packet effect on voters, so would have lower political saliency. It could also be implemented relatively quickly.”

Pension tax relief is viewed as a fundamental way of encouraging workers to save for their old age and avoid becoming a burden on the state. The gross cost of it is £70.6 billion. However, the government gets back £22 billion from pensioners paying more income tax as a consequence. That leaves an overall net bill of £48.7 billion, LCP says.