National Insurance Contributions (Employer Pensions Contributions) Bill

Wednesday 4th February 2026 Lords Chamber

Second Reading

20:50

Moved by

[Lord Livermore]

That the Bill be now read a second time.

[The Financial Secretary to the Treasury (Lord Livermore) (Lab)]

My Lords, it is a pleasure to open this Second Reading debate on the Bill. It legislates for reforms announced in the Budget in November. That was a Budget to build a stronger, more secure economy that had at its heart three deliberate pro-growth choices. First, by choosing to maintain economic stability, getting inflation and interest rates down, we helped to give businesses the confidence to invest and our economy the room to grow. Secondly, by choosing to reject austerity, we protected £120 billion of additional investment in growth-driving infrastructure. Thirdly, by choosing to back the fast-growing companies of the future, we supported the investment, innovation and economic dynamism that will increase growth in the next decade and beyond.

But these are choices that need to be paid for. That is why the Budget contained a series of reforms to the tax system to ensure that it keeps pace with a fast-changing economy. Those reforms include changes to pension salary sacrifice, contained in the Bill we are debating today. The Government spend over £500 billion each year on various reliefs within the tax system. That is more than double the entire annual NHS budget and nearly five times the annual budget for education. The size of this spend means the Government must always keep the effectiveness and value for money of tax reliefs under review. This Bill addresses just one of these reliefs: pension salary sacrifice, the cost of which was set to treble to £8 billion a year by the end of this decade.

That increase has been driven most by higher earners, with additional-rate taxpayers tripling their salary sacrifice contributions since 2017. This includes individuals sacrificing their bonuses without paying any income tax and national insurance contributions on them. But while those on the highest salaries are most likely to take part in salary sacrifice, others are completely excluded. For example, the majority of employers do not offer salary sacrifice, including many small businesses. Groups who are most likely to be undersaving for retirement, such as those on the national minimum wage and the UK’s 4.4 million self-employed workers, are also completely excluded from using salary sacrifice.

The status quo is neither fair nor fiscally sustainable. We cannot afford to allow the cost of pension salary sacrifice to balloon, benefiting predominantly higher earners. In this, we agree with the approach taken by the previous Government. In their 2015 Summer Budget, the then Government said:

“Salary sacrifice arrangements … are becoming increasingly popular and the cost to the taxpayer is rising”.


Two years later, the previous Government introduced reforms to salary sacrifice. The Finance Act 2017 removed the tax advantages of salary sacrifice for the majority of benefits in kind—for example, living accommodation or private medical insurance. The noble Lord, Lord Hammond of Runnymede, told the other place:

“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, Commons, 23/11/16; col. 907.]


The previous Government commissioned research in 2023, which included a proposal to cap pensions salary sacrifice at £2,000. This Government are now taking forward that reform to ensure that the tax system is kept on a sustainable footing.

Although some tax experts have called for pension salary sacrifice to be abolished entirely, the Government are taking a more measured and pragmatic approach. The Bill contains two main elements. First, it introduces a cap of £2,000 under which no employer and employee national insurance contributions will be charged on any pension contributions. The cap protects ordinary workers using salary sacrifice and limits the impact on employers while ensuring that the system remains fiscally sustainable. The majority of those currently using salary sacrifice will be unaffected. Indeed, 95% of those earning £30,000 or less who currently make pension contributions through salary sacrifice will be entirely unaffected. It is forecast that 87% of salary sacrifice contributions above the cap will be made by higher rate and additional rate taxpayers. Individuals can also continue to save as much as they wish into their pensions, either through salary sacrifice or outside of it, both of which will be fully relievable of income tax.

Secondly, we are introducing this change with a long implementation period so that it will come into effect in 2029-30. This gives employers and employees over three years to prepare and to adjust. I am pleased that business and industry bodies have already welcomed this lengthy implementation period. HMRC is also engaging with industry stakeholders to ensure this change operates in the most effective way. That will continue as we approach implementation.

Saving into a pension, including via salary sacrifice, will remain hugely tax advantageous under these changes. The Government currently provide over £70 billion of income tax and national insurance contributions relief on pension contributions each year. That spend will be entirely unaffected by these changes. Employees’ pension contributions, including those made via salary sacrifice, will continue to be fully relievable from income tax at the employee’s marginal rate. For example, if a basic rate taxpayer were to put £100 into their pension, it would cost them just £80 of their take-home pay, with the Government providing the remaining £20 in tax relief. For a higher rate taxpayer, that same £100 pension contribution can cost them as little as £60 because they also receive relief at their marginal rate of tax.

For employers, all pension contributions they make for their employees outside of salary sacrifice will remain exempt from both income tax and national insurance contributions. This makes pensions one of the most tax-efficient ways to invest in their workforce. For example, if an employer contributes £1,000 to an employee’s pension, this is worth £150 in forgone employer national insurance contributions.

Since the Budget in November, it has been suggested by some that these changes will negatively impact the overall level of pension saving. We do not believe this to be the case. Salary sacrifice existed in the 2000s and early 2010s, yet there were significant falls in private sector pension saving during this period. In 2012, only one in three private sector workers saved into a pension.

The key factor that has led to an increase in saving in recent years is not the complicated national insurance reliefs available to some employees, but rather automatic enrolment, introduced in 2012, which has reversed the collapse in workplace pension saving. As a result of automatic enrolment, over 22 million workers across the UK are now saving each month.

Evidence also shows that pension contributions have risen in line with regulatory requirements, not with the growth of salary sacrifice. The majority of employers reducing their tax bill by offering pension salary sacrifice did not use the savings to increase pension contributions. Overall, the Office for Budget Responsibility has made it clear in its economic and fiscal outlook that it does not expect a material impact on savings behaviour as a result of the tax changes made in the Budget.

These are fair and balanced reforms. They protect lower and middle earners, give employers many years to prepare, preserve the incentives that underpin workplace pension saving, and ensure that the tax system is kept on a sustainable footing. The Bill builds on reforms by the previous Government to the salary sacrifice system and legislates for proposals first put forward in 2023. It also forms part of a wider package of reforms to ensure that the tax system keeps pace with our fast-changing economy. As a result of these and other reforms, the Government were able to take a series of pro-growth choices at the Budget last year to maintain economic stability, to reject austerity, to protect investment and to back the fast-growing companies of the future. These are the right and responsible choices to strengthen our economy for the long term. I beg to move.

20:59

[Baroness Neville-Rolfe (Con)]

My Lords, this Bill is deceptively small. It runs to just four pages of text and could be easily mistaken for something minor. But its consequences for working people and for long-term pension saving in particular are serious and far-reaching. We are talking about pensions, not other benefits, which the previous Government reformed.

There is a risk that the Bill’s impact will be misunderstood or dismissed as marginal, but it is neither. In simple terms, it introduces a £2,000 annual cap on the amount of pension saving that can be made through salary sacrifice without attracting national insurance. Above that cap, pension contributions are treated as earnings for national insurance purposes. Because of the way NICs work, employees earning below £50,270 will pay national insurance at 80% on the excess; those earning above that threshold will pay 2% on the excess. That is the policy, and the question for this House is who it really affects and what behaviour it is likely to change. I thank all noble Lords for staying late and look forward to their contributions.

The Government have repeatedly argued that this measure is targeted at those they describe as high earners. Page 2 of the Explanatory Notes makes it clear that this is the Government’s intention, and the fashionable Minister, Torsten Bell, has said that the Bill “protects ordinary workers”. He implicitly recognises that, for those on low incomes, salary sacrifice is the only way to build up a significant defined contribution pension fund.

But what is immediately obvious to the pension providers, employers and experts that we have spoken to is that this is not, in practice, a measure aimed at the highest earners. It hits people squarely in the middle of the income distribution, and in some cases below it. Those saving responsibly through salary sacrifice are most affected. They include younger professionals in high-cost cities and mid-career workers trying to make up pension shortfalls, typically earning between £30,000 and £60,000 a year. Given that the average UK salary is £37,430, it is difficult to see how people earning within this distribution can be credibly described as high earners. They are ordinary working people doing exactly what successive Governments have spent decades encouraging them to do: saving responsibly for retirement.

I will give the House a concrete example. Imagine a young professional who has just graduated and taken up a job in a city—London, Bristol or Manchester—earning £45,000 a year. They decide to do the responsible thing and save seriously for retirement, contributing £5,000 a year through salary sacrifice. Under the Bill, £3,000 of that saving is treated as earnings for national insurance purposes, and that individual will be paying more national insurance, not because their income has increased but because they are trying to secure a decent pension. This represents an additional hit of £240 a year for a young working person, coming on top of student loan repayments at a ridiculously high interest rate, tax, existing national insurance contributions and the high cost of living.

This raises a question for the Minister: quite how are the Government defining a high earner? A graduate in their 20s, living in London and living on £45,000 a year—£40,000 after sacrificing £5,000 for their pension—is not a high earner: not against average income, and certainly not in the context of where they are living. So where has the Treasury decided to draw that line? Unless the definition is clearly set out, it risks becoming a flexible and politically convenient threshold, capable of being shifted over time to suit the Treasury’s needs. Without a fixed and transparent definition, no group can be confident it will not be caught by provisions targeted at high earners.

The example I gave goes to the heart of one of our core concerns with the Bill, which is that the likely behavioural response it will generate risks undermining pensions adequacy. We already know that adequacy is a serious and unresolved problem. Auto-enrolment, introduced on a cross-party basis, has been a major success in bringing people into pension saving. But even so, the statutory minimum contribution of 8% is widely accepted as insufficient to deliver a decent retirement income for many people. The system relies on employers paying over the statutory minimum for their workers to be sufficiently funded in retirement. That is not a controversial point; it is the settled consensus of the pensions world.

The IFS report, Adequacy of Future Retirement Incomes: New Evidence for Private Sector Employees, clearly makes the point that despite the success of automatic enrolment, a large minority of private sector employees are not on track for an adequate retirement income and saving has become more challenging. It found that only 57% of private sector employees saving in defined contribution pensions are projected to hit the Pensions Commission’s target replacement rates, and around one-third of savers are not projected to achieve even the minimum retirement living standard defined by the Pensions and Lifetime Savings Association

Against that backdrop, discouraging additional pension saving is exactly the wrong policy response, yet that is precisely what the Bill does. Evidence published prior to the Budget suggested that nearly 40% of workers would reduce their pension saving if the benefits of salary sacrifice were capped, and the costs and complexities of the new system will almost certainly mean that employers reduce their salary sacrifice offerings altogether. That outcome is a foreseeable consequence of the policy design set out in the Bill.

The effects of the Bill will be felt not just immediately but deeply over time. Lower saving today means lower retirement income tomorrow and greater reliance on the state in future decades. At a time when we are rightly concerned about the long-term sustainability of the public finances, it is deeply troubling to introduce a measure that reduces pension saving, thus storing up higher costs for future Governments.

It would be a mistake to pretend that the Bill bears only on savers. Employers, especially small businesses, will be hit directly by higher costs, new administrative burdens and unpalatable choices about pay and pension provision. It comes at the worst possible time. Businesses are already struggling under the cumulative weight of this Government’s economic choices—minimum wage increases, punitive business rates, an expanding national insurance burden and an economy mired in prolonged stagnation.

Under the current system, salary sacrifice arrangements are a widely used mechanism through which employers support pension saving. They reduce employer NI liabilities, simplify administration and enable employers to offer more generous pension provision without increasing headline wages. The Bill fundamentally damages that settlement.

From April 2029, employers will be liable for employer national insurance contributions at 15% on any salary-sacrificed pension contributions above £2,000. That represents a direct increase in payroll costs for any organisation with meaningful take-up of salary sacrifice arrangements.

Let us imagine an employee aged 50 with a £40,000 salary, trying to make up a potential pension income shortfall before they retire by sacrificing £5,000 per year. Their £5,000 sacrifice is due to trigger national insurance on £3,000 of that amount, costing the employer an additional £450 and the employee £240 per year.

The Office for Budget Responsibility assumes that around three-quarters of those additional costs will be passed on to employees, either through lower wages or reduced employer pension contributions. But even with these anticipated changes in behaviour, employers will still bear substantial transitional costs, ongoing compliance burdens and reputational risks associated with scaling back on pensions.

Employers will also face new administrative and reporting requirements. To administer the £2,000 cliff edge, they will be required to track and report total salary-sacrificed pension contributions through payroll systems, calculate national insurance liabilities on any excess above the cap and communicate clearly with employees about changes to their take-home pay. While the three-year window will allow many to update their payroll software, the complexity should not be underestimated, particularly for smaller employers without sophisticated payroll infrastructure or for employees with more than one job, which is common in the SME sector.

Faced with these costs and complexities, it is entirely rational for employers to withdraw salary sacrifice. The result is likely to be less flexibility, fewer incentives to save, and weaker pension provision across the workforce, making the private sector even less competitive as compared with the generous defined benefit pension provision in the public sector.

This is not mere speculation by the Opposition. The OBR’s own revenue projections already assume significant behavioural change, and evidence suggests that employers are actively reassessing their pension strategies in anticipation of the Bill, meaning that it is increasingly likely that the OBR has been overgenerous in its estimations. At a time when successive Governments have encouraged employers to play a greater role in supporting retirement adequacy, often paying above the statutory minimum, the Bill risks pushing employers in precisely the opposite direction. Higher costs, greater complexity and weaker incentives are not a recipe for stronger workplace pensions, and there could even be a backlash against the Government as individual employees find it difficult to know whether they have hit the cap.

The Government argue that this is a modest measure necessary to raise revenue of £4.8 billion—and, I note cynically, to do so by the end of the forecast period in 2029-30, which is the horizon against which the Chancellor’s fiscal rules are judged. The revenue assumptions depend heavily on people not changing their behaviour, but the evidence suggests that they will. When incentives change, behaviour changes, by both individuals and employers. When behaviour changes, revenues fall, but the damage to pensions adequacy remains. The Bill risks achieving the worst of all worlds: reducing trust in the pensions system, a cap that disincentivises pension saving by responsible individuals, an increase in future dependency on the state, and a failure to deliver the long-term fiscal benefits the Government want.

Tax is a behavioural lever—a powerful one—and should not be considered independently of other pension priorities. The Government are legislating for these changes in isolation today, at a time when the Pension Schemes Bill and the Pensions Commission are likely to transform the whole pension environment. Is this really wise? I believe this House must scrutinise this Bill, its costings and any regulations made under its powers with the greatest of care.

21:12

[Lord Londesborough (CB)]

My Lords, I accept that this Government, like their predecessor, have little room for manoeuvre if they are to keep within their fiscal rules at a time of sluggish growth, so I am not surprised to see them bearing down on the tax efficiencies of employer pension contributions, which the Treasury believes would generate almost £7.5 billion in tax revenue over the two financial years 2029-30 and 2030-31. Unlike with last year’s NICs Bill, with its growth-sapping and job-depressing £25-billion hike in employers’ NICs, I currently have no plans to table any amendments to this Bill—but I do have two questions for the Minister about Clause 1.

Before asking those questions, let me say that I am concerned that the Bill penalises the responsible working person who is doing the right thing, putting some money aside to fund their retirement and old age, as a pension funding crisis looms on the horizon. For greater insight into that, and the disturbing economics of our ageing society, perhaps I may recommend the latest report, Preparing for an Ageing Society, from the Economic Affairs Committee, on which I sit, as does the noble Lord, Lord Davies of Brixton. It is a sobering read because, quite simply, we are not prepared.

The first area I would like to probe concerns the forecasts for £40 million to £75 million annual losses in tax revenue in the next three years, before the Bill comes into force. I understand that those losses factor in the expected behavioural change that the noble Baroness, Lady Neville-Rolfe, correctly highlighted, but they strike me as undercooked based on what I am seeing and hearing at the coalface. I should declare that I am an adviser to, and invest in, a range of start-ups and scale-ups, a number of which, understandably, have drawn up plans for their staff to increase and front-load levels of salary sacrifice while the three-year window allows, so that both employer and employees reduce their exposure to NICs.

Of course, I accept that that is anecdotal evidence, but it strikes me that the behavioural change triggered by Clause 1 of the Bill may result in nine-figure annual reductions of tax revenues: that is, hundreds of millions, not tens of millions, as suggested by the very brief tax information and impact note. Could the Minister explain how these figures have been calculated? What are the assumptions? The Minister may be interested to hear the advice coming from a leading HR and tax consultant, whose advice to CFOs and CPOs reads as follows:

“There are still more than three years to take advantage of salary sacrifice available and, with another General Election due in 2029, the legislative landscape could change again”.


My second question concerns the rationale for setting the contributions limit at £2,000 per tax year, which, as we have just heard, will hit middle earners the hardest. As we have heard, due to the way that employee NICs work, the deductions will be 2% of the contribution over the cap for higher earners but up to 8% on the excess for people earning below £50,000. Why are we hitting this group, which includes nurses, therapists, teachers, data scientists, young professionals and entrepreneurs, so disproportionately hard? Could the Minister please explain? This has some echoes of last year, when the increases to employers’ NICs disproportionately penalised SMEs with more than three staff, employers in the lower-paid sectors and, especially, part-time workers in areas such as hospitality and retail—and look how that has worked out for job creation and employment prospects in those sectors since.

I finish with a more general point about our tax system. This Bill and last year’s Act highlight why we need to radically overhaul—that is, simplify—our horrendously complicated tax code, which is an accumulation of chopping and changing by Governments on both sides over the last 50 years or so. However, I acknowledge that that is a big subject for another day, and time is short.

21:17

[Lord Davies of Brixton (Lab)]

I thank my noble friend for presenting the Bill to the House. I speak as a friend of the Bill, although I suspect I will be its only friend apart from the Front Bench.

I do know something about the subject. I am a strong supporter of tax relief for pension provision—it is one of the foundations of a successful pension system—but that does not mean that we provide tax relief without limit. How much tax relief we provide is a question. You cannot logically adopt the line that every extra bit of tax relief is to be justified. The case has to be made.

I have listened to both speeches so far and read the articles in the press, and really the opposition to this change is all a bit overcooked. The total amount of tax relief granted to pension provision, occupational and contract based, is enormous, but the amount that is lost through this Bill is limited: it is marginal. It is obviously a significant amount to the individuals concerned but, looked at as an overall policy objective, the amount that is being reduced here is limited.

I have always regarded salary sacrifice as an illogical nonsense. It really makes no sense. It is a form of regulatory arbitrage and I have always thought that it was vulnerable to changes in government policy. What I had not realised, since I was active in advising members and employers, was how much it has grown in recent years. This is really the point: there was life before salary sacrifice became so popular. People still saved for their pensions and still received good pensions. The argument that this whole structure depends on salary sacrifice is nonsense.

The whole concept of salary sacrifice is based on a false dichotomy: that in some way, employer contributions are distinct from employee contributions. They might have a different label on them but they all come from the same employment package. It is fungible, to use a popular word. There is no real difference and to have one type, the employee contribution, which is subject to national insurance contributions and another form, the employer contribution, not subject to them is and always was nonsense, so I welcome this Bill.

There are practical problems to be addressed. We will have two days in Committee to look at those. Two days in Committee for what is effectively a one-clause Bill seems quite surprising, but maybe there are issues. How does it work for different periods of payment and people who have changing incomes during the year? How does it work for people with more than one job and how do we achieve confidentiality of an individual’s income from one employer rather than another?

There is also something that is a new term to me: optional remuneration arrangements—OpRAs. That appears in some way to limit the extent to which contracts can be changed. I think we will have to look at that carefully because, on the one hand, the way it is being done will lead to attempts to manoeuvre around the legislation; at the same time, we do not want it to cause problems with the jobs market. There will be behaviour change and, again, I would be interested in my noble friend’s views on how that will work.

I have run out of time. I support and welcome the Bill and I look forward to an interesting period in Committee when we will get the details right.

21:22

[Lord Leigh of Hurley (Con)]

My Lords, it is always a pleasure and a challenge to follow the noble Lord, Lord Davies of Brixton, but I welcome his remarks.

This is the second attempt by the Government to raise money by stealth through national insurance—first on workers, now on savers. Your Lordships will recall the disaster of the last Bill to try to do this and its wrecking effect on the UK economy, so let us have a look at these proposals and the impact they may have.

We are, of course, aware of the Government’s need for cash, not least for their out-of-control welfare bill. Spending on health and disability benefits alone is forecast to reach nearly £100 billion by 2030, and the CSJ shows that around 6.2 million full-time workers—roughly one in four—would now be financially better off on benefits than in work, when you take tax into account. It is a shame that the PM could not stand up to his Back-Bench colleagues and deliver the necessary reform on welfare. As a result, the Government are scrapping around with initiatives such as this, which will have a potentially disastrous effect on people’s desire and ability to save for their pension. It is not just the numbers; it is the message.

This Bill simply punishes people who are trying to do the right thing. We were told by Labour that it would not raise taxes on working people, so perhaps the Minister can explain how this fits in with that commitment, given that the NI will come straight out of people’s salaries, including the salaries of people who are, frankly, on quite modest incomes.

The Bill hits the regular taxpayer very hard. It follows the retrospective tax changes on pensions whereby this Government applied inheritance tax on private pensions. Needless to say, the main group of people not affected by those changes are, of course, those who work in the public sector and, in particular, the Civil Service. The Minister used the word “fair” a lot in his opening remarks, but does he not see how unfair this Bill is? While civil servants’ pensions are protected for life—and, indeed, often for their spouses—the Bill does not impact them at all. It is only those working in the private sector—typically, by the way, much more so on middle incomes than higher incomes—who get attacked by the Bill.

Why are the Government making it so much harder for private sector employers to contribute to the pensions of their employees? Does the Minister recognise that it is the private sector employee who will have to fund the unfunded £1.5 trillion liability of public sector pensions? Perhaps it is because there is so little private sector expertise on the Front Bench, with the notable exception of both Ministers sitting there tonight. The amount raised by the Bill peaks at £4.845 billion in 2029-30 but then, according to the Red Book, falls to £2.585 billion in the following year.

We are told that this is due to behavioural changes. However, I cannot find any explanation as to what this might mean. Could the Minister please elaborate: what behavioural changes? In his opening remarks, I think he referred to no changes in savings behaviour, so how is this extremely dramatic fall explained? Is it a coincidence that the amount generated peaks in 2029-30, which is the year that counts for the Chancellor’s fiscal rule and possibly the year of an election? Do the Government realise that taxpayers will feel that they are taking money out of their pockets just at that moment?

I commend to the Minister the representation from the Chartered Institute of Taxation, of which I am a qualified member. I do not have time to go through it all, but it is clear that the Bill does not explain what is meant by—as the noble Lord, Lord Davies of Brixton, mentioned—“optional remuneration arrangements”. In particular, greater clarity is needed as to which conversations between employer and employees regarding pay and pension provisions could give rise to optional remuneration arrangements.

As noble Lords may well be aware, there are two types of optional arrangements: type A, which the Bill clearly covers, and type B, which it does not. Is the Bill intended to cover type B optional payments, which new subsection (6A) sort of implies? This is a big subject and needs much more work before Committee so that we can all understand what the Government’s intentions are.

Likewise, insufficient thought has gone into how the ridiculous annual £2,000 limit would be applied to employees paid weekly or monthly and those with multiple employments. Has thought been given to the likely impact on some employees where employers might withdraw pension salary sacrifice schemes as an option? What do they do?

Finally, as the Minister knows, I am always happy to be of assistance to the Government and, in this respect, I am happy to discuss other ways of raising revenue in this area, as I have done, for example, in VAT. I would like to understand from the Minister what assessment has been made of the effect of a national insurance charge levied on self-employed and LLP partners, which seems to me to be fair and would raise substantial amounts of revenue. I do not expect an answer on that tonight. We had a debate on it in an Oral Question a few weeks ago. A noble Lord who is a KC suggested that doing so might frighten off the legal profession to other parts of the world. I am not convinced that that is a fair argument, and I would like to see the Treasury’s assessment, perhaps in writing at a later date.

In the meantime, I look forward to the answers to the questions I have raised and a detailed discussion of these issues in Committee, and I just hope the public are made aware of the real effects that the Bill will have on them.

21:29

[Baroness Altmann (Non-Afl)]

My Lords, first, I need to declare my interests as a non-executive director and a board adviser to pension companies. I understand the Government’s thinking, in theory, about the anomaly, as they probably call it, of national insurance relief, but in practice, this policy will have serious negative impacts. Indeed, I wonder whether it will save anything like the sums expected, as it will have damaging unintended consequences on both pensions and growth.

We seem to have a “push me, pull you” pensions policy, with the DWP setting up a Pensions Commission to review adequacy and improve pensions, while the Treasury increases tax on and the cost of employer pensions, making pensions less attractive and more expensive. This will reduce adequacy and hit growth. It will certainly reduce the take-home pay of a vast number of workers. It is, in effect, a tax on working people, as the noble Lord, Lord Leigh, has said. A rise in the cost of pension provision imposed on employers—but almost exclusively in the private sector—is surely the equivalent of a tax increase on ordinary working people.

If employers are already contributing more than the minimum, their pension costs are bound to rise because of this measure. The likelihood is that they will cut back to the minimum, making pension outcomes worse. The noble Lord, Lord Davies, doubts the scale of this impact. One of the reasons that salary sacrifices have increased so significantly since 2016 is that so many more employers have come into pensions as a result of auto-enrolment. There are hundreds of thousands more which were not there before; if they have advice they are told that it is a no-brainer to have salary sacrifice, because everybody benefits except the Treasury.

If employers are already contributing at the minimum and they cannot cut back, the likelihood is that as the cost of employment rises—because of the costs of pension provision—they will either reduce wage rises or cut employment levels. This is not some theoretical assumption, because all employers have to provide these pensions. The Government see this as impacting only high earners. As the noble Baroness, Lady Neville-Rolfe, and the noble Lord, Lord Londesborough, have already described, this is simply not so. It will hurt ordinary workers, especially middle earners. Reducing take-home pay and pensions will either reduce current pay, or deferred pay, or both.

I have a number of practical questions for the Minister. What happens if someone changes jobs during the year? How will the new employer know how much of the £2,000 contribution limit has been used up so far? Who is responsible for compliance, and for reporting to HMRC? Employers may need to update their pension scheme rules, member booklets, calculators, website information, staff portals, and so on. What is the Government’s estimate of the cost to business of all that? What is the estimate of the cost to employers which need to renegotiate their employment contracts for staff who agreed to a pay cut to accommodate a salary sacrifice that no longer applies? Who will cover the costs of all the increased queries that are bound to arise, including the cost of system and software updates, and member comms? How many employers will decide to abandon salary sacrifice altogether, and do the Government’s estimates of cost savings factor in the reduction in growth, and the reduction in future pensions, to offset the expected savings?

In conclusion, I hope that the Government will think again. There is plenty of time. What do the Government want from our pensions system? Do we want private pensions to improve? Do we want pension assets to support growth? If so, we need to encourage more pension contributions and incentivise holding and investing more for longer. That will not be achieved by increasing taxation on pensions or raising employer pension provision costs. These are important issues to assess in relation to the £80 billion-plus cost of tax and national insurance reliefs. They should be the subject of a holistic review in the round, rather than continuous, ongoing salami-slicing, tax by tax. This leaves workers and pensions potentially worse off and will potentially worsen the growth and living standards of the future.

21:34

[Lord Ashcombe (Con)]

My Lords, I wish to express deep concern about the Government’s decision to impose a £2,000 cap on salary sacrifice arrangements for pension contributions. This measure may appear technical, but its consequences for retirement saving are anything but trivial. It raises serious questions about the coherence of the Government’s approach to pension adequacy at a time when the nation can ill afford missteps.

Salary sacrifice has long been a legitimate and widely used mechanism, enabling employees to exchange part of their salary for pension contributions, benefiting from both tax and national insurance relief, as we have heard. It is not a loophole. It is not an avoidance scheme. It is a deliberate feature of the system that encourages people to save more for their retirement. By imposing this cap, the Government are restricting one of the few tools that has demonstrably helped individuals to boost their pension savings in a tax-efficient manner.

This decision comes at a time when the UK is confronting a substantial and widening retirement savings gap and when an independent commission is actively considering how best to strengthen pension adequacy. The evidence is stark. The Department for Work and Pensions acknowledged in 2025 that around 14.6 million working-age people are undersaving for retirement. The Scottish Widows Retirement Report 2025 shows that only 30% of the population is currently on track for a “comfortable retirement”, while 39% are at clear risk of falling short. Mercer—I declare my interest as an employee of their sister company Marsh—has repeatedly highlighted, most recently in 2024, the need for higher contributions if we are to close the savings gap.

Against this backdrop, it is difficult to understand how the Government can justify a policy that will, in effect, discourage additional voluntary saving. The commission’s message has been unambiguous: we must help people to save more for their later life, not place fresh obstacles in their path.

The scale of the impact is not marginal. According to the Government’s own explanatory notes, 3.3 million savers—around 44% of employees using salary sacrifice—stand to be affected. Many of these would not be considered high earners exploiting generous tax reliefs. Furthermore, there are lower and median earners who make occasional larger contributions when they can, often after life events or periods of financial stability. This cap will hit them the hardest. It risks undermining the ability of savers to build a secure retirement income at precisely the moment when demographic pressures, an ageing population and rising life expectancy make adequate saving more essential than ever.

There is a fundamental question of fairness. The pension adequacy commission is tasked with ensuring that all workers can aspire to a decent retirement income. Yet this cap risks creating a two-tier system: those who wish to save more are restricted, while those already struggling to save enough continue to face structural barriers. Rather than reducing inequalities in retirement outcomes, this measure threatens to entrench them.

The implications extend beyond individuals. Some 290,000 employers currently use salary sacrifice arrangements, benefiting from reduced employer national insurance contributions. If the cap reduces participation, employers will face higher national insurance liabilities, increasing the cost of employment. The OBR suggests that many employers will shift to ordinary pension contributions, including relief at source schemes.

Under these arrangements, employees will pay full income tax up front and reclaim it later, effectively giving the Exchequer an interest-free loan. In 2029-30, this manoeuvre raises £4.85 billion, before falling to £2.29 billion the following year when individuals reclaim the tax on the previous year. It is hard to avoid the conclusion that the Government are playing cash-flow games with workers’ retirement savings while imposing yet another cost on employers. At a time when economic growth is desperately needed, this policy risks becoming yet another drag on the very companies we rely on to invest, innovate and employ. I urge the Government to reconsider.

A pensions system must be judged by its ability to help people build security for later life. Policies that restrict saving, complicate incentives or undermine confidence run counter to that mission. If we are serious about addressing the challenges of an ageing society, then tax and national insurance policy must align with and not work against the goal of pension adequacy. The Government still have time to correct their course. I hope they will do so, in the interests of savers, employers and the long-term financial health of our country.

21:40

[Lord de Clifford (CB)]

My Lords, I raised the topic of today’s debate, salary sacrifice, in the Budget debate on 4 December. I am grateful to the Minister for his comments on my questions in summing up that debate. He felt that the changes to salary sacrifice pension arrangements were a proportionate measure that would mainly affect higher-rate taxpayers. I reflected on those comments. They are possibly fair, but the cost of this measure is not fair to all employees, employers and working people trying to save for pensions over their working lives.

I note my registered interest as an SME business owner and employer. For employers like my business that have benefited from NIC savings over the past 10 years, it will be another addition to our ever-increasing tax burden on employers for the privilege of employing people.

The Government have noted that there will be behavioural changes by individuals and businesses with regard to this proposed change. As set out in the explanatory notes, as many noble Lords have mentioned, NIC receipts will increase to just under £5 billion in the first year, reducing by 41% in the second. Of this reduced figure of £2.5 billion, the majority will be paid by employers. As someone who does the monthly payroll for 130 employees, of which 24 will be affected, I am aware that the extra employer NIC would mean an additional £8,500 for our business. This means that I will certainly be investigating, like other businesses, how we can pay employees’ pension contributions via other methods.

One of the benefits of auto-enrolment, as mentioned by others, is that it has encouraged more salary sacrifice to take place. Employees have found it easier to make pension contributions and additional contributions above the minimum of 5%, as it is a lot simpler to contact your employer than a pension provider, plus some employers are willing to match any additional contributions due to NIC savings. One possible outcome is that employers will make only the minimum contribution to auto-enrolment salary sacrifice schemes to avoid additional NICs, therefore creating a barrier for people to save money.

Another concern is that it is unfair on some workers. Medium earners, as my noble friend Lord Londesborough mentioned, will suffer most from this change. According to the Resolution Foundation, 75% of workers will not be affected as they do not pay salary sacrifice. Of the 25% who do, only half will be affected as their salaries are below £40,000, if pension contributions are based around 5%. Therefore, only 12.5% of workers will be affected. The highest-paid individuals—those paid over £100,000—represent 32% of the salary sacrifice contributions paid and 3% of employees, according to the Institute for Fiscal Studies. These are highly valued employees and will have the financial resources, with their employers, to look for other ways to avoid this NIC payment, for example through the optional remuneration agreements mentioned tonight, therefore reducing the tax take from higher taxpayers, which was the aim of this policy.

This change of policy will affect the medium earners of the workforce. It will be an additional stealth raid on their income and future savings. This group of earners is already being dragged into the 40% taxpayer bracket. How are aspiring members of society under 32, as my noble friend Lady Neville-Rolfe mentioned earlier, who are paying student loans at 9%, expected to buy homes, start a family and save for the future with an ever-increasing tax burden on their income?

In summary, this Bill targets employed middle earners who want to save for their future via pensions, and employers who will have to pay even more NIC. This change brings further complexity to an already complex tax system. Is it necessary? Would it not have been simpler not to bring in a change at all, as a lot of the targeted taxpayers will avoid paying this NIC, as noted by Government, or to withdraw pension payments from salary sacrifice in total, therefore making it simpler?

21:45

[Baroness Maclean of Redditch (Con)]

My Lords, it is a pleasure to follow the noble Lord, Lord de Clifford, who spoke about his personal experience of running a small business, which I also share.

When the Bill was introduced, the Treasury Minister in another place said:

“It is the richest who benefit from these schemes ... it is right that we make the scheme fairer for all”.—[Official Report, Commons, 17/12/25; col. 1023.]


It is a weird definition of “fair” when someone earning £45,000—a basic rate taxpayer—is penalised for saving too much for their pension.

I reject the notion that fairness means endless redistribution from those who contribute to those who do not. A truly fair society recognises that those who work hardest, take the most risk and contribute the most deserve to be rewarded, because it is their success, and the wealth they create, that make it possible to help people who genuinely need the help. You do not lift up the poor by bringing down the rich; you do not make anyone richer by arguing about slices of the pie. Your Lordships do not need me to remind the House that it was Mrs Thatcher who said that. This progressive instinct—to take ever more from those who contribute and redistribute it endlessly—is yet another thing that sounds compassionate but is the opposite.

However, it is not just on values that I differ from the Government. I also differ from them in the practical outcomes. It actually would not matter if we had different values if the evidence showed that their policy was going to be successful and help people and society; but, as we have heard from all across the Chamber, these policies are not successful: they are economically illiterate and self-defeating. You just cannot tax your way to prosperity. Societies around the globe have tried it over and over again and it never works.

Your Lordships should consider this: the top 1% of earners in the country pay approximately 29% of all income tax. The top 10% pay roughly 60%. These are not bad, greedy or selfish people. They are working damn hard and are carrying the entire system on their backs. And what is their reward? To be told they are not paying their “fair share”. To face ever-higher taxes. To see their pension arrangements restricted, and to be demonised while people who choose not to work or who have only recently arrived in this country and never paid in, get benefits paid for by these very taxpayers.

The Government have claimed that this measure targets higher earners who benefit disproportionately from salary sacrifice, but that is just not the case, as we have heard in many other remarks. The Chartered Institute of Taxation found that limiting salary sacrifice will affect basic rate taxpayers more, pound for pound, than higher and additional rate taxpayers. Moreover, this change is likely to cause some employers to withdraw pension salary sacrifice as an option.

I started my business with my husband in a small flat above a former garage in Acocks Green, which is a suburb in inner-city Birmingham. We could not compete with large employers—established large companies—for the kinds of graduates we were trying to hire. We barely even had a flushing toilet in the first years we were starting, so we had to offer something to get people to actually come and work for us. We were able to offer salary sacrifice and pensions: that was one thing that we could do. We could not offer any other fancy perks, but at least we could offer that, and we knew that we were doing the right thing for people.

It is not surprising, unfortunately, that the Government take this approach, because—with a couple of honourable exceptions sitting here tonight—barely anybody in the Government has actually ever started a business or knows what it is like or has even worked in the private sector. Unfortunately, the Treasury’s own figures show that approximately 85,000 basic rate taxpayers will be affected by this. These could be people earning about £45,000 after 20 years in the workforce. The Treasury Minister talks about the rich, but these are not millionaires or billionaires: they are not Elon Musk. They are people who have just worked very hard in ordinary jobs for 20 or 30 years. They are the backbone of our country. They are saving for the future and they do not ask anything from the state. Yet their taxes are going up on absolutely everything and they do not get any of the benefits available to people on lower incomes. They cannot use those benefits and they do not use those services.

This is another restriction on these people’s ability to save, while the Government are subsidising many others who make lifestyle choices not to work and have unlimited numbers of children, while claiming benefits and not working. We are seeing that balloon now, with the two-child benefit cap going. We are providing housing and support for record numbers of illegal migrants at taxpayers’ expense. This is the absolute madness of this system now. The Bill is yet another punch in the guts for exactly the kind of country that we want to encourage and the people who keep this country going.

The Department for Work and Pensions estimates that two-fifths of people are not on track to achieve their retirement incomes, so the solution is to encourage more saving. I am out of time, but can the Government please look at amendments to protect basic rate taxpayers, index the threshold to inflation and require comprehensive review before implementation?

21:50

[Lord Fuller (Con)]

My Lords, it is not just a capitalist economy that runs on incentives; it is human nature to calibrate actions through the lens of what is in it for us. Encouraging people to work hard, succeed, earn their place in the world, and deliver safety and security for themselves and their families, while generating the taxes that sustain public services, is the right thing. But get that balance wrong by destroying the incentives to do the right thing, or set tax rates too high, and that leads to no tax at all. It is the Laffer curve in action, and Britain is being subjected to a whole-economy experiment on the Laffer curve. At every level, incentives to advance in the UK are being weakened, just as incentives in other countries become more attractive.

Behaviours do change. A close school friend and a substantial British taxpayer has just gone to live in Dubai. Someone in my electoral ward is buying a ranch in Montana, and expensively trained newly qualified doctors and nurses are moving to Australia. Our problem is so bad that, earlier this evening in your Lordships’ House, we had an emergency debate on emergency legislation.

What is the effect of this Bill on those who are left behind? First, it creates a glass ceiling on aspiration—on salaries approaching £100,000. But, as we have heard this evening, it is not just those salaries but middle-class professions that are affected, such as those found in the other place, and mechanics, timber merchants, solicitors and accountants—a whole raft of middle-class aspirational professions.

I am sure the Minister will talk about those with the broadest shoulders, but I will give the example of my daughter’s boyfriend, who works in the West End. He was so proud to come and tell us he had been awarded a £17,000 bonus from his business for having worked so hard and become so valuable to his firm, but I was astonished when he told us that he got to keep only just over £6,000 of that tidy sum. He is paying not 60% but nearly 70% because of the student loan. Why did he bother to work so hard? He has the broadest shoulders only in the sense that he plays rugby at the weekend, but he is no fat cat. He is 28 and at the start of his career. He lives in a flatshare with people he does not know in Brixton—perhaps the noble Lord, Lord Davies, could go round and knock on his door. He is just a young man working hard for long hours, trying to save for a deposit to climb the ladder and better himself.

But at least that option or incentive has been opened to my daughter’s boyfriend to sacrifice some of that bonus to salt away some money into his pension, well over 30 years away, so that one day he might be able to reduce his reliance on the state—and, yes, perhaps look after my daughter—but that option will be slammed shut by this Bill. Earning £17,000 to get around £6,000; that is not right. I say to the noble Lord, Lord Davies: that is what has been overcooked. How much more can the man be expected to give for having worked so hard? Of course, let us not forget his company, which will have had to chip in another £2,500 in its own NIC. It is not right for him, it is not right to drive the brightest and best overseas, and it is not right for our economy or the Exchequer in the long term.

I know that salary sacrifice is not for everyone, but it is for many. As we have heard, it incentivises people who are doing well at the start of their career to invest in themselves, with a second long-term return for the state by reducing their reliance on the taxpayer in later years—both the individual and the state co-investing in our collective future.

We know that limiting salary sacrifice will affect basic rate taxpayers more, pound for pound, than higher rate taxpayers, although I accept that the sums are larger for the higher earners. We have heard, and I confirm, that employers will withdraw pension salary sacrifice as an option altogether. It is going to complicate pensions and HR in companies that are already burdened with extra costs and onerous duties, and will potentially encourage undesirable optional remuneration agreements and avoidance schemes. Further, we will see few practical details around how that £2,000 limit will be applied to weekly and monthly paid employees, and those with multiple years.

Taken together, this Bill is just another example of bureaucratic, counterproductive, anti-growth, incentive-sapping policies: more taxes on employment, inexplicable investment-sapping taxes on private rather than public businesses, existential taxes on pubs, crippling carbon taxes on our heavy industries, discriminatory taxes on private, not public, pensions and—astonishingly—even new taxes on tomatoes that will disproportionately affect those with the smallest means. Now, with this Bill, there are new taxes to discourage people from doing the right thing. This insanity will impoverish us all and the Minister is creating a fresh black hole in his name. The Government will drive tax revenues down into the dirt and impoverish our nation.

21:56

[Baroness Kramer (LD)]

My Lords, I do not enjoy the same pension expertise as virtually every other speaker tonight; I also do not think, ideologically, that I fit well with the last two speakers, who take a position that is different from mine. However, even I can see that this Bill is another example of the Treasury’s inability to align taxes with its stated economic and industrial goals, including its plans for growth. I note the points made by the noble Baroness, Lady Altmann, and the noble Lord, Lord Ashcombe, that you have one department trying to encourage people to increase their savings and pensions because of pension inadequacy—“push me, pull you” as the noble Baroness described it—and then the Treasury working, it seems, in completely the opposite direction.

On that general growth objective, I guarantee to the Government that capping salary sacrifice NICs exemptions will not add a single penny to the amount that working people save and invest. Yet savings and investments are the key drivers of the prosperity we seek. Some 3.3 million people, which is 44% of those who save through salary sacrifice, will be hit by this change.

Others have made this point, but I particularly noticed that the recent report from the Pensions Policy Institute warned in the strongest terms that people are not sufficiently building their pension during their higher earning years, which is exactly when salary sacrifice comes into play. For many people—this probably particularly affects women who take time out for childcare—higher earnings are typically for only a period of someone’s working life. Therefore, it is during that period that they need to be able to put aside that money for later life and pensions. This capping change works exactly in the opposite direction of letting them push down on the accelerator during that relatively limited period of higher earnings, when they can set money aside.

We are not talking about multi-millionaires, as people have said; this is about incentivising millions of ordinary people to put more aside during those years when their income is just sufficient to allow them to do so. I regret that the Government, rather than encouraging that approach through this Bill, are now discouraging it.

For individual workers, this change comes in the context of frozen income tax thresholds, as well as eye-watering increases in the cost of living. Many who diligently choose to live more frugally and save through pensions have already faced the changes in inheritance tax, and now they have this. The two have to be seen together as changing the psychology of many who are trying to make a decision about what to do with their money. Many will now reduce their saving for old age. How anyone thinks this will help with the demands on or the cost of social care—two of the biggest burdens that we carry as taxpayers—I simply do not know.

For businesses, especially small businesses—the noble Baroness, Lady Maclean, spoke as a living example of someone with a small business, as is the noble Lord, Lord de Clifford—this is just another tax rise at a time when so many other costs have been thrown on to businesses. We debated business rate changes just last week.

While larger businesses may find other ways to help their employees—it has certainly been clear from some of our speakers that there are mechanisms that they can turn to—most small businesses do not have that capacity. The cost of both employee and employer NICs, especially in small businesses, tends to fall on the workers in the end. It creates a real differential between being employed by a big firm or a small one. The Federation of Small Businesses has looked at this Bill and warned of the impact on staff retention. I just wonder: does no one in the Treasury understand that an expanding small business sector is the backbone of the economy, our major source of new jobs, the underpinning of communities and the birthing ground for key industries of the future?

Then we have the investment impact of curtailing pension savings. Only yesterday, in Committee on the Pension Schemes Bill, we were dealing with the Government's concern to direct pension savings into investment in the UK economy, from private equity into infrastructure—absolutely core and key to their growth agenda. How on earth does this Bill help that? In fact, how does it not hinder it? The Mansion House Accord, on which so much of the Pension Schemes Bill rests, applies only to a small part of the pension world: auto-enrolment by low earners. If the Government are seriously looking for a step change in investment into the UK economy and into the riskier parts of the UK economy, it is exactly the money that goes into salary sacrifice schemes that they require to undertake those kinds of ventures.

The noble Lord, Lord Londesborough, talked about the timing of the Bill and the potential for front-loading salary sacrifice schemes over the next few years. That is a point that the Government need to address. The timing of when this comes in is truly weird. I cannot work out whether the change that takes place in 2029 is essentially an actual change or an attempt to game the fiscal rules. We are past the point where any of us want to accept the gaming of fiscal rules anymore. We know what it did under the last Government, and we do not want to see it repeated here.

I give way to others who talked about the practical impacts: what do you do with someone who changes jobs? How do you deal with the paperwork and the systems? I am very conscious that those things that get brushed aside often turn out to be huge stumbling blocks. We need to hear more from the Government on that.

The prize for any Government when it comes to pensions is to get people to save in their times of higher earnings as much as they reasonably can. That is what reduces demand on the taxpayer for social care and benefits in old age. Frankly, with our ageing population, it is increasingly vital, not less vital. This Bill simply pushes in the opposite direction. We need to address that through serious amendment.

22:03

[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.

22:11

[Lord Livermore (Lab)]

My Lords, it is a pleasure to close this Second Reading debate. I am grateful to all noble Lords for their expertise, their contributions and questions, particularly at this late hour.

The Bill before your Lordships’ House legislates for reforms announced in the Budget last November. It was a Budget to build a stronger, more secure economy that had at its heart three deliberate pro-growth choices: to maintain economic stability, to protect £120 billion of additional investment in growth-driving infrastructure, and to back the fast-growing companies of the future, but, as I have said previously, these choices need to be paid for. That is why the Budget contained a series of reforms to the tax system to ensure it keeps pace with a fast-changing economy. Those reforms include the changes that we are debating today.

As several noble Lords mentioned this evening, the Government spend over £500 billion each year on tax relief. The size of this spend means they must always keep the effectiveness and value for money of tax reliefs under review. This Bill addresses just one of these reliefs, pension salary sacrifice. The cost of that was set to treble to £8 billion a year between 2017 and the end of this decade. That growth has been fastest among higher earners, with additional rate taxpayers tripling their salary sacrifice contributions since 2017. But while those on the higher salaries are most likely to take part in salary sacrifice, others are completely excluded. For example, the majority of employers do not offer salary sacrifice, including many small businesses. Groups who are most likely to be undersaving for retirement, such as those on the national minimum wage and the UK’s 4.4 million self-employed workers, are also completely excluded from using salary sacrifice. The status quo is therefore neither fair nor fiscally sustainable. We simply cannot afford to allow the cost of pension salary sacrifice to balloon, benefiting predominantly higher earners.

The Bill therefore contains two main elements: first, to introduce a cap of £2,000 under which no employer and employee national insurance contributions will be charged on any pension contributions. Some 95% of those currently making pension contributions to salary sacrifice earning £30,000 or less will be entirely unaffected. Secondly, we are introducing this change with a long implementation period so that it comes into effect only in 2029-30. This gives employers and employees over three years to prepare and adjust.

The noble Lord, Lord Leigh of Hurley, asked about the Government’s commitment not to increase taxes on working people. As he knows, the Budget in November kept our manifesto promise not to increase income tax, national insurance or VAT. It contained a series of reforms to the tax system to ensure it keeps pace with our fast-changing economy. The cost of pension salary sacrifice was set nearly to triple to £8 billion between 2017 and the end of the decade—as I said before, benefiting mainly higher earners.

The noble Baroness, Lady Neville-Rolfe, spoke extensively about the impact on employers. The Government are taking a pragmatic, balanced approach by introducing a cap which protects ordinary workers and limits the impact on employers while ensuring that the system remains fiscally sustainable. The majority of employers—some 61%—do not offer this kind of salary sacrifice arrangement. Of the employers which do, most sectors, including retail, hospitality and leisure, have salary sacrifice contributions well below the £2,000 cap and are largely protected. Everyone using salary sacrifice will still benefit from the tax advantages available up to the £2,000 cap, this includes employers, which can make up to £300 of employer national insurance contribution savings through salary sacrifice per employee. These changes will not be implemented for over three years. In comparison, the previous Government gave just one year’s notice from announcing their changes to salary sacrifice in 2016 to implementing them from 2017.

The noble Baroness, Lady Neville-Rolfe, also spoke about employers potentially stopping offering salary sacrifice schemes. The Government do not expect significant numbers of employers to stop offering salary sacrifice arrangements. Everyone using salary sacrifice will still benefit from the tax advantages available up to the £2,000 cap.

The noble Baroness, Lady Altmann, asked about the cost to employers. The majority of employers do not offer salary sacrifice arrangements, and most sectors, including retail, hospitality and leisure, have salary sacrifice arrangements well below the cap. Everyone using salary sacrifice can still benefit from up to £300 employer national insurance contribution relief under the cap, and the full national insurance contributions relief is available on employer pension contributions outside of salary sacrifice. The Government are working closely with employers and the payroll industry to operationalise the change in the most effective way.

The noble Baronesses, Lady Neville-Rolfe and Lady Kramer, and the noble Lord, Lord de Clifford, spoke about the impact on small businesses. Small businesses are far less likely than larger businesses to offer pension salary sacrifice. Only 10% of employees in SMEs have pension contributions through salary sacrifice exceeding the cap, compared with 18% of employees in larger firms. The noble Baroness, Lady Neville-Rolfe, also spoke about the impact on retail, hospitality and leisure businesses. As I have said already, most firms in this sector have salary sacrifice contributions well below the £2,000 cap and are therefore largely protected.

The noble Lords, Lord Londesborough and Lord de Clifford, spoke about the impact on low earners. Higher earners are most likely to be using salary sacrifice and the majority of those currently using salary sacrifice will be unaffected by the changes. The Bill impacts only employees who use salary sacrifice to make pension contributions, which is around 35% of employees. Those earning at or near the national living wage cannot use salary sacrifice at all. The noble Lord, Lord Londesborough, also asked about basic rate taxpayers. The £2,000 cap is worth up to £160 a year for basic rate taxpayers. Those earning below £30,000 making pension contributions through salary sacrifice are overwhelmingly protected, with only 5% making pension contributions above the cap.

The noble Baroness, Lady Neville-Rolfe, asked about individuals earning around the £50,000 mark. The Government are taking a pragmatic, balanced approach by introducing a cap which protects ordinary workers and limits the impact on employers, while ensuring that the system remains fiscally sustainable. Everyone can still save up to £2,000 via salary sacrifice free of national insurance contributions. Amounts sacrificed above £2,000 will continue to be fully relievable from income tax, but we must continue to ensure that the £500 billion of tax reliefs provided each year are effective and provide value for money.

The noble Lord, Lord Leigh of Hurley, asked about the profile of the costings, also mentioned by the noble Lord, Lord Ashcombe. The costings reflect independent OBR scrutiny and use the best available data on current salary sacrifice and bonus sacrifice behaviour. Employees will respond to the changes in a number of ways. One way is that many employees will switch to making ordinary pension contributions, some of which will be to relief at source schemes. Where an employee contributes to a relief at source scheme, they will initially pay higher rate and additional rate income tax on their pension contributions and then reclaim this through their self-assessment tax return in the next year. This creates a temporary timing effect. Beyond the forecast period, this effect becomes very small.

The noble Baroness, Lady Maclean of Redditch, asked about indexing the £2,000 cap. The Government have no plans to index the cap, but we will keep the £2,000 level under review to ensure that it continues to meet its objectives and remains fair across the labour market. This is consistent with the approach to other pension tax reliefs, including the annual allowance.

The noble Baroness, Lady Altmann, and the noble Lord, Lord Londesborough, asked about the costings of this policy and about the savings generated from this change. The costings for this policy have been scrutinised and certified by the Office for Budget Responsibility in its economic and fiscal outlook. They already account for changes in employer behaviour, including employers providing higher employer pension contributions to replicate the national insurance contribution benefits of salary sacrifice. We remain confident of these costings.

The noble Baronesses, Lady Neville-Rolfe and Lady Kramer, and the noble Lord, Lord Leigh of Hurley, suggested that this was designed only to meet the fiscal rules in 2029-30. The reality is that the Government are giving employers sufficient time to prepare and adjust their systems by implementing the changes from April 2029. That is over three years’ notice before the changes take effect. We are also engaging with employers, payroll administrators and other stakeholders on the administration of the cap to provide certainty ahead of implementation.

On that specific point, also raised by the noble Baronesses, Lady Neville-Rolfe and Lady Altmann, and the noble Lords, Lord Leigh of Hurley and Lord Fuller, about the administration of this policy, HMRC is engaging with a wide range of stakeholders in the payroll, employer and software developer industries to work through exactly how the cap will be implemented. This will be vital to ensuring it is implemented in the least burdensome way possible for employers. Engagement will also help inform the secondary legislation, in which the detail of the operability will be set out and further consulted on.

My noble friend Lord Davies of Brixton spoke about how salary sacrifice is just one part of the pension landscape, and I say that to the noble Baroness, Lady Neville-Rolfe, who did not mention during her contribution that saving into a pension, including via salary sacrifice, will remain hugely tax advantageous even under these changes. The Government currently provide over £70 billion of income tax and national insurance contribution relief on pension contributions each year. That spend will be entirely unaffected by these changes. Employees’ pension contributions, including those made via salary sacrifice, will continue to be fully relievable from income tax at the employee’s marginal rate. For employers, all pension contributions remain exempt from both income tax and national insurance contributions. This makes pensions one of the most tax-efficient ways to invest in their workforce.

The noble Baronesses, Lady Neville-Rolfe, Lady Altmann and Lady Kramer, spoke about the impact on pension savings. The Government do not believe that these changes will negatively impact the overall level of pension saving. Salary sacrifice existed in the 2000s and early 2010s, yet there were significant falls in private sector pension savings during this period. In 2012, only one in three private sector workers saved into a pension.

As I said in my opening, the key factor that led to an increase in saving in recent years is not the complicated national insurance reliefs available to some employees but rather automatic enrolment, which the noble Baroness, Lady Neville-Rolfe, spoke about, and which has reversed the collapse in workplace pension savings. As a result of automatic enrolment, over 22 million workers across the UK are now saving each month. The Office for Budget Responsibility has also made it clear in its economic and fiscal outlook that it does not expect a material impact on savings behaviour as a result of the tax changes made in the Budget.

The noble Baronesses, Lady Altmann and Lady Kramer, spoke about the impact on individuals who are currently undersaving. The groups that we know are undersaving for their pension, including low earners, women and the self-employed, are the least likely to use salary sacrifice. Workers on the national living wage are excluded entirely from salary sacrifice, and so are the 4.4 million self-employed people across the UK. By contrast, these changes overwhelmingly affect higher and additional rate taxpayers. In 2030, 87% of affected salary sacrifice pension contributions made from earnings will be from higher and additional rate taxpayers.

The noble Baroness, Lady Altmann, also mentioned the Pensions Commission. There is cross-party agreement on the importance of the work of the Pensions Commission as it examines questions of adequacy and fairness. The Government will not prejudge the commission’s work.

The Budget in November contained pro-growth choices to maintain economic stability, reject austerity, protect investment and back the fast-growing companies of the future, but these are choices which need to be paid for. That is why this Bill reforms pension salary sacrifice to ensure that our tax system is kept on a sustainable footing. The Bill protects lower and middle earners, gives employers many years to prepare, and preserves the incentives that underpin workplace saving. These are fair and balanced reforms. They build on the steps already taken by the previous Government to reform salary sacrifice and strengthen our economy for the long term. I beg to move.

Bill read a second time and committed to a Grand Committee.

House adjourned at 10.24 pm.