National Insurance Contributions (Employer Pensions Contributions) Bill

Lord Fuller Excerpts

Tuesday 24th February 2026 Grand Committee

[Lord Davies of Brixton (Lab)]

I support the Bill. It is an eminently reasonable approach to the difficult financial situation in which we found ourselves when the Labour Government took office. No one likes increases in taxation—it is easy to say “No, no, no”—but given the outcome of the election, some increase in taxation was required.

I listened to the debate with interest, including the points raised on student loans in relation to Amendments 3 and 16. I do not understand it, but I hope that my noble friend the Minister does and that he can give a satisfactory response.

I am a bit concerned when people talk about the Bill “penalising” people. Taking away an advantage struggles to be a penalty. The idea of salary sacrifice makes no sense; it is regulatory arbitrage and a sort of kludge that has no real justification. It is also unnecessary. The idea that the pension system will suffer greatly from the removal of this particular tax relief is fanciful. Some people regard the golden age of pensions as having been 10, 20 or 30 years ago; virtually no one then had salary sacrifice and yet schemes boomed and people saved for retirement. We cannot sustain an argument that providing an adequate pension for most people requires this form of salary sacrifice, particularly when £2,000 is being allowed.

As I said at Second Reading, I disagree with the idea that this is, in some way, a mortal blow to pensions— I may exaggerate slightly, but there was continual suggestion that this was a severe blow to people’s attempt to provide themselves with a decent pension. It is interesting that people who are arguing to keep this salary sacrifice are those who, at the same time, oppose the triple lock, and yet the triple lock is doing far more than this would do for people on low incomes to secure an adequate income in the future, so I do not accept that argument about impact.

The important issue is that this bit of tax relief on pensions should be seen in the context of the overall tax relief on pensions. What is the right level overall of providing relief through the tax system for pension provision? We all know it is substantial; it is enormous. If you count all the different forms it could take, it comes to about £90 billion. When the scheme has matured, this will take away £2.5 billion. That is why I said at Second Reading that it is marginal; it is not crucial for the future of pensions.

The issue of tax relief on pensions is controversial. Think tanks love a report on tax relief on pensions. None of them is proposing an increase in tax relief on pensions, yet this is the way that we are heading. The Government’s figures—which no one has disputed—suggests that more and more people will seek more and more salary sacrifice to get more and more tax relief on pensions. Yet when the think tanks look at these issues, they say, “Well, no, it should be targeted towards the lower paid”. If anyone thinks that this will cause problems—I am looking at the noble Baroness, Lady Kramer; I think the Liberal Democrats have supported, or toyed with, the idea of having a flat-rate tax relief on pensions—I suggest that moving to a flat-rate tax relief on pension contributions will cause an absolute nightmare.

There is one point here that I accept. My noble friend the Minister can take it as a helpful suggestion rather than a criticism, but the use of the term “higher earner” could have been judged better. Noble Lords will be pleased to know that I have a spreadsheet, which calculates the impact that people suggest this measure is going to have. Of course, the 2% and 8% feature means that there is a kink in the line of the relief that you get from salary sacrifice because, up to a certain level, you pay 8% contributions through national insurance and you are getting the relief at 8%. Then, after that, it is 2%. It is not that the Government are seeking out people to charge more money; it is the structure of the system.

Let us look at the figures. I sometimes have problems in these debates when other speakers quote figures because it is difficult to understand them without seeing them in writing with some explanation. I think that, in general, there should be a ban on quoting figures in these sorts of debate. However, I am going to quote some figures. The median level of contributions to a pension scheme is 5%—that is, between 4% and 6%—on median earnings below £40,000. Now let us take the higher figures: someone paying employee contributions of 6% with earnings of £40,000. They are using salaries in full on their contributions. For them, the change will be an extra £32 a year. Those are the figures we are talking about for those on median earnings and those on median contributions.

As has been mentioned, bonus sacrifice is clearly a separate issue. This is where the legislation is required. It is being exploited in these circumstances. The bonus should be enough. The bonus is of great value. Some people in the City get vast bonuses. The idea of using that money to exploit this illogical tax relief through salary sacrifice is abhorrent.

I support the legislation. The term “higher earnings” could have been handled better but the whole issue—people on median earnings paying very little more and complicating the system in order to remove basic rate taxpayers; perhaps my noble friend the Minister can tell us about the impact it would have on income—has been over-egged; that was, I think, the phrase I used before. This is an eminently reasonable measure to address the country’s financial problems.

[Lord Fuller (Con)]

My Lords, the noble Lord said that he cannot see the sense in this. Why do we have this incentive in the tax system? The answer is that it is the role of government to incentivise good behaviours, which include saving for your retirement, trying to climb the ladder and trying to do better for yourself, not least because, in so doing, you reduce your reliance on the state in later life. That is the sense of the salary sacrifice process.

This Government have perpetrated a series of attacks on youngsters at the start of their careers, graduates and people making a start in their working lives. The Renters’ Rights Act has driven up rents. The Employment Rights Act has made it harder for businesses to take a chance on somebody who may be unqualified or changing role. The Government are putting youngsters into unemployment with the jobs tax. Now this slim Bill will add many more cases—I am going to list them in a minute—of intergenerational unfairness. Let nobody say that Labour is on the side of the youngsters who want to get on.

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[Lord Leigh of Hurley (Con)]

The purpose of the Bill is to catch salary sacrifice schemes. As we discussed in the previous group, this is where an optional remuneration arrangement has been made, but there are instances when an increased pension could be offered to an employee and no option is offered for the cash increase in salary. That is the area that I am exploring in my amendments.

In these circumstances—according to the Labour Party’s manifesto, the drafting of the Bill and all the Explanatory Notes—I do not think there is an intention to change the national insurance treatment. Indeed, this is clarified in the policy background sections of the Explanatory Notes on the Bill issued by the Government. This amendment, tabled by me and the noble Baroness, Lady Altmann, seeks to make that clear and cannot be seen as controversial.

Amendment 4 is easier to explain than Amendment 3, so let me have a go. I accept that Amendment 3 is not easy to understand, and I am not sure I understood the Minister’s response to it. It would be very helpful if, before Report, he could clarify whether he agrees that, as I suggest in Amendment 3, the definition of earnings will be affected by the Bill, and whether the Government will address that issue.

The Bill is predicated on the definitions of optional remuneration arrangements. They can include company cars and—as the noble Baroness, Lady Coffey, said—assisted places in nursery, medical insurance and other areas, but the Bill makes it clear that we are focusing here on salary sacrifice. The reason for my amendment is that there may be some people who achieve an increase in pension contributions but not through salary sacrifice. In my view, an optional remuneration arrangement has not been properly scoped or defined for the purpose of the Bill.

Perhaps it is easiest to understand this concept when thinking about a new employee. Such a person will be negotiating their compensation with a potential employer. Let us say they are offered a salary of £50,000 and a £5,000 pension contribution. They might feel that this is insufficient payment and seek a higher salary. The employer could refuse that on the basis that all people of that rank in their organisation receive a sum of £50,000 and they have no flexibility—but they may offer an increased pension of £10,000 rather than £5,000 to reach an agreement. How is that negotiated figure of £10,000, which was previously £5,000, to be treated? What if the employer said, “I will reduce the salary to £45,000 and give you £15,000 in pension”? Is this an optional remuneration arrangement, particularly with a prospective, rather than actual, employee?

Similarly, let us look at termination settlements. An employee may receive a lump sum in lieu of any other claim and might be offered an excess amount over the normal £30,000 to be paid directly to the pension scheme. Is that an optional remuneration arrangement?

Let us consider something perhaps closer to home for the Minister: cases where collective bargaining takes place. There might be two offers on the table: one is for a 5% increase in pay but will keep employer pension contributions at 8%, and the other is for a 4% increase with an increased employer pension contribution of 10%. If the collective bargaining unions agree on the latter, are we to assume that this is an optional remuneration agreement? I would assume not, but it is not clear.

In the negotiations of remuneration, what if a person agrees with an employer that they will not take any increase in salary but they want a greater pension payment? That is not salary sacrifice—which is in the heading of the Bill and peppered throughout the definitions used in the Bill and the Explanatory Notes—but does it qualify as an optional remuneration arrangement?

This is a probing amendment to try to get some clarity into the Bill. Clarity is needed because there is so much in the Bill that, frankly, does not seem to have been considered as it relates to people’s working lives.

Amendment 33, in my name and that of the noble Baroness, Lady Altmann—and, yes, in this group—deals with the very difficult situation where a person has a number of employments. It seems a bit disappointing that the Bill does not address this obvious problem. Perhaps the draftsman had only one job—I do not know. National insurance contributions are typically calculated weekly or monthly for most employees, and calculated separately by different employers, assuming such employees are not part of the same group; if it is all one group company, it is done by one head office, typically.

The question arises: how will the £2,000 limit be applied across different periods and employments? This could be covered in regulation later, I suppose, which seems the Government’s favourite approach to much of legislation, but it is right to discuss this in Committee and encourage the Government to put their thinking cap on now to try to get it right so that there can be proper consultation and scrutiny before the legislation is enacted.

Where employees are paid monthly, should that employer apply 1/12th of the £2,000 to each month’s salary-sacrificed earnings or wait until the month in the year in which that amount has exceeded £2,000? Likewise, as the noble Lord, Lord Londesborough, questioned, what happens when an annual bonus is paid? Does that distort the £2,000, which I assume is for the year to 5 April? The bonus could be paid in May or June, completely distorting all the figures. If an employee changes employment part way through the year, how does that work in practice? Does the amount sacrificed in the old employment carry over to the new employment, or should the employee benefit from two separate caps, which will be the requirement for information to be passed from one employer to another? How will HMRC cope with this? Currently, no information exchanges are available.

Then, of course, there are a number of us—I include myself—who hold down more than one job at a time. I declare that interest, although I am not caught by the Bill. Will the £2,000 annual cap be split between each employment, or can employees benefit from two separate caps so that each employer can offer £2,000—which might encourage some slightly unexpected behaviour of people taking lots of jobs, or with subsidiaries or associates, as a clever avoidance trick? There is already incentive within the NI system to do this, as separate allowances exist for separate employers.

We also have to think about financial privacy here, as information would need to be shared across different employers. I raised earlier the problems facing us where an employee does not actually sacrifice salary but still makes a pension contribution, and it is not clear what happens if an employee enters into a bonus waiver in exchange for an increased employer pension contribution. It is complicated, because the employee has no legal rights to the bonus, so there is nothing to sacrifice. What is the Government’s view in these circumstances?

All in all, one can see an administrative nightmare all around. It would be extremely helpful if these issues could be addressed by the Treasury in guidance, setting out the basis on which the Treasury considers how the Bill will apply before it comes into force, hence my amendment.

While on my feet, I support the amendments tabled by the noble Lord, Lord Fuller, which seem pretty clever to me. I am somewhat annoyed I did not think of them myself, because it is pretty obvious when you read his amendments that it must be right—I am supposed be the chartered accountant—that there should be some spreading to allow for circumstances where one year was not a good year and another was. That seems only fair. I beg to move.

[Lord Fuller (Con)]

My Lords, I rise to speak to my Amendments 4A, 4B, 17A and 17B, and the associated review clause, Clause 29A. I will also speak to support Amendment 33 in the name of the noble Lord, Lord Leigh of Hurley.

Taken together, these amendments try to address the practical workability of proposals for employers with employees who have multiple employments and fluctuating income, and to ensure consistency with other parts of the taxation system while being consistent across Great Britian and Northern Ireland.

How easy it must be for the huddles of Ministers and civil servants sitting in their little meeting pods in that ground floor cafe at 1 Horse Guards—or perhaps dialling in from home, having taken the dog for a walk—to tinker with their spreadsheets and to come up with policies viewed through the lens of their personal experiences but which do not stand up in the real world. We have new tax policies that have damaged the national economy and growth. This Bill in particular, however, damages incentives for individual employees and companies for which they work; these are incentives to work hard, to climb the ladder, to improve yourself and to save for a secure retirement, and incentives for employers to attract the best talent.

As we have heard, it is not just the people on 100 grand that this policy affects—although it raises their marginal tax rate to 70% if they are paying off a student loan—it affects a whole raft of people. With the minimum wage now set at over £26,000, millions of ordinary hard-working people—the sort of people this Government say would escape higher taxation—will now be snared in this net, as the Daily Telegraph has reported. It amounts to a new tax on workers; this much we know. But my amendment focuses on the potential unfairness to a particular type of hard-working employee that makes it nearly impossible for their employers to administer it: an employee juggling several jobs.

How do the Government intend to deal with this and make fair the practical unintended consequences and perverse outcomes? Let us take the example of the employee who works several jobs. How will her employer know when or if she has maximally sacrificed her two salaries without reference to the other? That point was made very ably by the noble Lord, Lord Leigh of Hurley. The noble Lord also identified the privacy issues that come with this—which I wish I would have thought of.

Let us take another example, of an employee engaged in seasonal work who wants to save monthly into a pension on salary sacrifice. How does he set his regular contribution at the start of the year without knowing whether he will bust his allowance later on? In his winding on the previous group, the Minister said that you will never know the band until the end of the tax year--well, quite.

What about the employer who wants to do the right thing by his graduate employees and knows how difficult the job market is for them right now? Let us say he wants to attract the best talent by offering accelerated repayments of student loans by way of a salary sacrifice opportunity. We have a colleague in this House who is a graduate, and his graduate loan is running away; he is paying off £400 a month and still the debt is getting larger. We must help these people.

What about the youngster saving for a pension? As I said at Second Reading, my daughter’s boyfriend is no fat cat; he is living in a flat share with people he does not know in Brixton—I do not know whether the noble Lord, Lord Davies of Brixton, ever knocked on his door as I invited him to do at Second Reading. But ask his opinion on this and he will say that instead of improving his own financial security—and perhaps that of my daughter in due course—by reducing his dependence on the state in later life, his ability to save for his future and to progress now is weakened. These are practical and personal examples; each of them damages that incentive to work hard and save hard. That is bad enough.

However, this Bill further discriminates against the private sector worker who needs to save for his own retirement under the direct contribution system, when public sector employees have the taxpayer pitching in another 20% to their pot. The ham-fisted way this Bill ignores the real-life complexities for these real-life people and their real-life examples that exist outside the comfortable, monthly-paid final salary pension world shows how the Treasury views these things through its own particular lens.

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[Lord Davies of Brixton (Lab)]

I spend most of my time in these debates about tax relief on pensions defending the existing system, because the people I tend to mix with regard that tax relief as grossly unfair. It obviously gives far more to the higher paid than the lower paid, and that is why there is widespread discussion of having flat-rate tax relief on pensions. If we were starting from scratch, I think we could do that, but we are not. We have to start from where we are.

Where we are is in having extremely high levels of, effectively, government subsidy for people to save for retirement, but that begs the question: what is the right level of tax relief for pensions? Does it just happen to be that we have alighted at the correct level, or is that an issue we are not allowed to discuss? Putting words into the mouth of the noble Lord, Lord Fuller, he seems to be adopting the argument: “The more the merrier—let’s increase it by even more”. No, there is a genuine question here. What is the right level of tax relief to encourage people to save for their retirements? It is a reasonably practical debate and, on this side, we have come to the conclusion, possibly as an interim measure, that it should be a bit lower than it is currently. That certainly does not justify the doom and gloom about this particular change—I have made my point several times.

I am no longer a small business person, but for 30 years I was and I employed people who had multiple jobs. It is not a new issue. There is nothing new about the idea of employers having to cope with the complications of the national insurance system for people who have multiple jobs, particularly where, even with two jobs, their total income is more than the £1,250 that it is at present. It is not a new issue that employers are going to have to deal with. In principle, there is an additional complication; they have to sort out where the £2,000 limit applies. However, it is reasonable to expect employers to undertake those tasks. To be honest, I do not think that an ice-cream salesman is really a genuine example, but I may be wrong.

[Lord Fuller (Con)]

I take my territorial designation from Gorleston-on-Sea. When I was a boy, there was nothing better when the sun was out than going down to Della Spina’s, the ice-cream place. It is not just about ice cream; there are stately homes and all sorts of things that work with the weather. That is why I chose the example of the umbrella salesman or the ice-cream vendor. There is a whole part of the UK economy that depends on the weather. We have the most unpredictable weather, there are the most turbulent income and costs associated with that, and that boils down into variable emoluments. It is not just the market gardener or the farmer; it is the people involved in hospitality or whatever. To say that it is trivial demeans the pubs, the restaurants, the stately homes and that wider part of the visitor economy, which is particularly visited on the coast and in coastal communities. I wonder whether the noble Lord would like to reflect on the somewhat dismissive way in which he put that huge part to one side. Millions of people work in these sectors; they would be disadvantaged by the Bill and that needs to be recognised.

[Lord Davies of Brixton (Lab)]

I accept the noble Lord’s reprimand. I was actually making another point, which is about how many ice-cream salespeople are operating salary sacrifice arrangements. That may not be immediately germane. In fact, the remarks that the noble Lord just made support my point. Those part-time employees and part-time employers are already having to cope with the problems that arise from multiple employments and how the national insurance system is not, in truth, tailored very well for those circumstances. I accept that.

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[Baroness Neville-Rolfe (Con)]

Before the Minister moves on, would he consider making an affirmative regulation on the very first occasion? The discussions that we have had this evening show that there is quite a bit of complexity here, and that has compliance costs for employers and employees. It seems odd to take the precedent of the social security Act on something new and difficult. I wonder whether that would be worth considering. Perhaps the Delegated Powers and Regulatory Reform Committee did not have the benefit of the experts here who have explained some of the problems. I am sure the Minister cannot say anything today, but could he at least have a look at whether the first such regulations could be by affirmative resolution, which is a practice that I have encountered with lots of other Bills that we probably worked on together?

[Lord Fuller (Con)]

If I may interject, especially with such a load of—

[Lord in Waiting/Government Whip (Lord Wilson of Sedgefield) (Lab)]

Can we just let the Minister reply to that?

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[Lord Livermore (Lab)]

That intention will be set out in the regulations once we have fully consulted relevant employers.

[Lord Fuller (Con)]

There is a transfer of risk, of prejudice, from the individual, who is responsible under the current arrangements, to the employer. That has not been fleshed out at all. If you have a salary sacrifice that is processed by the employer, all of a sudden that employer trespasses on the duty at the end of the tax year for the employee to put in his tax return. There has been a muddying of the water here between the employee and the employer. I know we are going to come back on Report, and I hope we will get it done in a day, but the Government should lay out their approach to this and state where the liability sits and where the penalties may be applied for honest mistakes made in that interface between the employer and the employee. That is not at all clear, and it should be.

[Lord Livermore (Lab)]

I am grateful to the noble Lord for his further thoughts. The carryover feature—