In what is likely his final Budget before the next general election, Chancellor Jeremy Hunt has announced some changes that could be significant for pension schemes and plan members. In our key takeaways, we highlight three announced and proposed adjustments relevant to employers running workplace pension schemes and what these could mean in the future.
Employees currently pay 10% class 1 national insurance contributions (NICs) on earnings over £12,570, reducing to 2% on earnings over £50,270. The Chancellor Jeremy Hunt has announced a 2% cut to the main rate of NICs to take effect from 6 April 2024. From 6 April 2024, employees will pay 8% and 2% respectively.
This Budget announcement follows a 2% cut to NICs from 12% to 10% announced in November 2023 that took effect from 6 January 2024.
Salary exchange is a tax-efficient way of making pension contributions because it means less gross income is subject to NICs and higher take-home pay is realised. Where salary exchange is implemented, employers may want to update their salary exchange communications following the recent announcement from the Chancellor and consider providing financial education to scheme members.
Following revised retirement lifestyle figures from the Pension and Lifestyle Savings Association (PLSA); we know the cost-of-living crisis has meant a 12%, 34%, and 15% increase in the cost of a minimum, moderate, and comfortable retirement lifestyle respectively for a single person. For many, it may seem difficult to afford but the reduction in NICs means increased take-home pay for employees.
Whilst other immediate financial needs may be pressing, the NICs reduction presents an opportunity for policyholders to increase pension contributions; and increase the likelihood of being able to afford their desired retirement lifestyle.
Those who redirect the employee NICs savings using salary exchange as extra pension contributions rather than as increased take-home pay will need to make adjustments to their current pension contribution arrangements.
The Government has proposed requiring the publication of contract-based defined contribution default funds' historic net investment returns and a breakdown of their UK investments.
There are also plans to compel defined contribution schemes as well as local Government schemes to disclose their level of investments in UK equities.
These are intended to foster transparency and easier scheme comparison on a like-for-like basis with a focus on facilitating better outcomes for scheme members. The implementation and effect of these proposals remain to be seen.
The Government intends to explore a lifetime provider model for defined contribution pension schemes in the long term.
The Government will undertake continued analysis and engagement to ensure that this would improve outcomes for pension savers, and build on the foundations of reforms already underway, including the Value for Money Framework.
Its effect will be monitored to see the impact on employee outcomes: whether it means potentially higher costs than the current qualifying workplace pension scheme model, employer costs in administering, and the potential knock-on effect of reduced employer support.
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By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. You should always seek appropriate tax advice before making decisions. HMRC Tax Year 2023/24.
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