How National Insurance hike could affect pension pots as workers stand to lose up to £2k in retirement – how to beat it

THE National Insurance hike could mean workers lose as much as £2,000 in retirement.

During her inaugural Budget, Chancellor Rachel Reeves announced a raise to the headline employer rate of National Insurance (NI) from 13.8 to 15%.

The Chancellor also announced a reduction to the threshold business start paying NICs from £9,100 to £5,000.

Ms Reeves insisted her Budget would protect the nation’s employees as per Labour’s manifesto.

But top economists warned her National Insurance hike on bosses would ultimately be felt by their staff in reduced wage rises. 

Independent consultancy firm Barnett Waddingham has worked out how the NI change might affect individual pension pots at retirement.

This is because increasing employer NI could cause some businesses to cut back on wage increases, which would then affect how much money goes into pensions.

It might also discourage employers from raising how much they contribute to their employees’ workplace pensions in the future.

Experts at Barnett Waddingham found that if employers reduce pay raises, a typical 35-year-old who contributes 8% of their salary could end up with a pension pot that’s 4% smaller by retirement.

This means their annual retirement income could be over £2,000 less in today’s money – depending on what their salary is now.

Hugo Gravell, principal and investment consultant at Barnett Waddingham said: “The Government’s announcement of a 1.2% increase in employer NI contributions may well lead businesses to tighten their purse strings, with employees left to pick up the tab through lower salary increases – and by extension lower pension contributions.

“The change could reduce this year’s salary increase by almost 2.5% for an employee who earns £35,000 and was due to get a pay rise of 3% before the change.”

He added that while the one-off reduction in the lower threshold for paying NI is a big driver for this, the announcement will make paying salaries more expensive in future years as well.

If businesses react by reducing annual salary increases by just 0.5% in the future, the impact for DC [defined contribution] savers would be significant, Hugo said.

How will this impact different-sized pension pots?

Barnett Waddingham also crunched the numbers for several different salary amounts.

It found that for an employee on a £35,000 salary – which is the average salary in the UK – an employer will be paying an extra £925.80 in NI following the hike.

In each case, £615 of this is due to the 15% NI on salary from £5,000 to £9,100.

Employers who had budgeted to award a 3% pay increase would need to reduce these increases to just 0.67%.

This would be to mitigate the increases in costs – not taking into account pension contributions and other salary-related employee benefits.

Hugo said: “Importantly, this is not a one-off windfall tax.

“Paying salaries will be more expensive in future years too. If businesses react by reducing annual salary increases by just 0.5% in the future, the impact on DC savers would be significant.

Because of this, they’d end up with a 4% smaller pot at retirement, and an annual income of around £700 less in today’s money.

For a worker on a £60,000 salary, their employer will need to pay an extra £1,225.80 in NI.

This would lead to a pay increase of just 1.19% if they’d budgeted for a 3% rise.

In turn, this would result in a 4% smaller pot at retirement and an annual income of around £1,200 less.

Employers will also pay an extra £1,705.80 in National Insurance for an employee on a £100,000 salary.

If they’d budgeted for a 3% pay rise they would need to reduce these increases to just 1.49%

How can you beat the hike?

An effective way to enhance your pension savings is through salary sacrifice, Hugo explained.

A salary sacrifice scheme is where a worker agrees for a chunk of their earnings to be put into a tax-free benefit.

Often, these include benefits like childcare vouchers, gym membership or a cycle to work scheme.

But you can also use salary sacrifice schemes to boost your pension.

The money you agree to take off your salary will be put into a pension scheme – and your employer will contribute to this pot too.

One of the main advantages of using this scheme is that you pay less in taxes like National Insurance, and the full amount you’ve sacrificed will be put into your pension.

Because the money is going straight into your pension, both you and your company will pay less in National Insurance Contributions (NIC), meaning that your take-home pay will be higher.

Hugo said: “The appeal of salary sacrifice is growing stronger due to the increased employer National Insurance rate.

“The savings on NI through pension salary sacrifice become more attractive with this higher rate.”

When you join a new company, you are usually “automatically enrolled” into its workplace pension scheme.

You then contribute a percentage of your salary towards your pension each month – the minimum is 5% – while your employer contributes a minimum of 3% unless you opt out.

Shifting to salary sacrifice for an employee’s 5% pension contributions can lead to significant benefits, Hugo explained.

For an employee with a £35,000 salary, the extra employer NI reduces from £925.80 to £663.30.

As a result, their salary increase could be 1.32% instead of 0.67%.

For an employee with a £60,000 salary, the extra employer NI reduces from £1,225.80 to £775.80.

This means their salary increase could be 1.84% rather than 1.19%.

For an employee with a £100,000 salary, the extra employer NI reduces from £1,705.80 to £955.80.

As a result, their salary increase could be 2.14% rather than 1.49%.

Should I use a salary sacrifice scheme?

Although sacrificing your salary could be concerning if you’re on a lower income, remember that you pay less in income tax and National Insurance.

Which? says that if you sacrifice £1,000 for example, you won’t be losing this entire amount overall – you’ll be losing less than £70 a month in income tax alone if you’re a basic rate taxpayer.

If your financial situation changes, you can also choose to opt out of the salary sacrifice scheme – or reduce the amount of money you’re taking out of your pay.

However, it’s not available to everyone – if it reduces your earnings below the minimum wage, you won’t be eligible.

The minimum wage currently stands at £11.44 an hour.

If you’re planning on buying a home anytime soon, you might want to consider if the scheme is right for you.

Lenders will base how much they’re willing to give to you on your salary – if this is lower then the amount you can take out for a mortgage will also be lower.

Certain state benefits like maternity pay may be affected too because of your lower NIC – so it might not be a good idea for budding parents.

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