The NHS, schools and other parts of the public sector will be spared from any costs caused by a move to require employers to pay National Insurance on contributions to staff pensions.
The Chancellor, Rachel Reeves, has signalled she will make up any resulting in shortfall in budgets, which would have meant making cuts to key services.
However, the move has triggered a backlash from some private businesses and opposition MPs who argue it is wrong and unfair to protect public services while hitting employers in the private sector with a big bill.
Research by the Institute for Fiscal Studies (IFS) has argued it would be “sensible” for the government to levy National Insurance (NIC) on employer contributions, which would potentially raise £17 billion a year it is was levied at the full NI rate of 13.8 percent.
The IFS has suggested the impact of the change on the private sector could be mitigated by introducing a new low rate of NI on employer contributions to pensions.
It is estimated that sparing the public sector from the impact of the change to pension tax rules would cost the Government an estimated £5bn, which would reduce the amount of money raised.
Finance experts claim it would be “outrageous” to protect the public sector against changes to pension tax rules while not providing the same support to those in the private sector, including charities or others, such as firms providing social care.
Baroness Ros Altmann, the former pensions minister, told the Telegraph: “If the public sector cannot cope with imposing National Insurance contributions on pensions, then that is a clear indication that all employers would also struggle and this change should not be imposed at all.
“Damaging private sector workers, and their employers, while forcing them to pay for even better public sector pensions, would be a serious mistake.”
In theory, imposing NI on employers rather than employees will have no direct impact on people’s pay packets. However, business leaders have indicated that they would recoup the cost by cutting future pay rises or reducing pension contributions to the legal minimum of 3 percent of salary.
Analysis by wealth manager Quilter estimates the typical high earner would lose out on £1,818 a year in pension contributions if employers decide to pass on the additional cost by paying less into retirement pots.
Kate Nicholls, Chief Executive of UKHospitality, has described any move to make employers pay NI on pension contributions as a “tax on jobs”.
“An increase would particularly hammer sectors like hospitality, where staffing costs are the biggest business expense,” she said.
“Hospitality businesses are much less able to stomach yet another cost increase, when they’re already managing increases in other areas like wages, food, drink and energy. But it is hospitality that is most likely to support people from economic inactivity back into the workforce.
“If the Government is to achieve its plan for growth and getting more people into work, it should use the Budget to incentivise that. It should be looking to support job creation, as well as reducing the cost burden for businesses.
“For hospitality, that means no increases to employer National Insurance Contributions and action to avoid a billion-pound tax bill for venues when business rates relief is set to end in April.”
Sir Steve Webb, former Liberal Democrat pensions minister who is now a partner at LCP, said there are positives to the move, adding: “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.”
