NICs Bill: peers warn of impact on savers and employers

The government’s case for reform

Opening the debate, the Financial Secretary to the Treasury, Lord Livermore, described the Bill as part of a wider package of fiscal reforms announced in the November Budget, linking it to the government’s ambition to build a ‘stronger’ and ‘more secure economy’. He stated: “The government spend over £500 billion each year on various reliefs within the tax system… The size of this spend means the government must always keep the effectiveness and value for money of tax reliefs under review.”

The minister highlighted that the Bill addresses concerns that the cost of pension salary sacrifice has escalated in recent years, adding that the “increase has been driven most by higher earners”. He said that the proposed £2,000 cap would protect lower and middle earners while limiting the fiscal impact of the relief, stressing “95% of those earning £30,000 or less who currently make pension contributions through salary sacrifice will be entirely unaffected.”

Lord Livermore said that the government’s two-part approach includes both the cap and a long implementation period, with changes taking effect from 2029–30. “This gives employers and employees over three years to prepare and to adjust,” he explained. He believed that pension saving would remain “hugely tax advantageous”, highlighting the continuing availability of income tax relief on employee contributions and employer National Insurance Contributions (NIC) exemptions for contributions made outside salary sacrifice. Concluding his argument, the minister reiterated that: “We simply cannot afford to allow the cost of pension salary sacrifice to balloon, benefiting predominantly higher earners.”

Concerns about fairness and distributional impact

Many peers challenged the fairness of the policy, including shadow Treasury minister Baroness Neville-Rolfe, who warned that the Bill’s impact would fall not on the highest earners but on those in the “middle of the income distribution”. She suggested that “it [the measure] hits people squarely in the middle of the income distribution… typically earning between £30,000 and £60,000 a year.”

Providing an example, she described a £45,000-earning young professional whose pension savings would now trigger NICs, saying that the “individual will be paying more national insurance, not because their income has increased but because they are trying to secure a decent pension.” She questioned the government’s framing of the affected group as high earners, adding: “A graduate… living on £45,000 a year… is not a high earner.”

The shadow minister said tax was a powerful behavioural lever and should not be considered independently of other pension priorities.

Baroness Altmann (a non-affiliated peer) and Lord Londesborough (Crossbench) echoed the concerns about the ‘disproportionate’ impact on middle earners, including nurses, teachers and young professionals, with the latter adding that, “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”.

However Lord Davies of Brixton (Lab) welcomed the Bill saying: “I am a strong supporter of tax relief for pension provision… but that does not mean that we provide tax relief without limit”. He further suggested that: “The total amount of tax relief granted to pension provision… is enormous, but the amount that is lost through this Bill… is marginal”.

A Conservative peer, Lord Ashcombe, warned of the risk of creating a “two-tier system”, suggesting that: “Rather than reducing inequalities… this measure threatens to entrench them.”

Lord Leigh of Hurley (Con) said the Bill punished people who are trying to do the right thing, and suggested it breached the government’s promise not to raise taxes on working people. However, he added, he was happy to discuss other ways of raising revenue in this area. With this in mind he asked for the government's assessment of what the effect would be of a national insurance charge levied on self-employed and LLP partners, suggesting that it seemed to him to be a fair proposal.

Practical arrangements

Lord Leigh also raised some of the practical points made in the CIOT’s representation to peers. Recommending that representation to the minister, he said that the Bill “does not explain what is meant by 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”. He also felt that insufficient thought had gone into how the annual £2,000 limit would be applied to employees paid weekly or monthly and those with multiple employments.

Lord Fuller (Con) warned that the measure would 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.” Like Lord Leigh he worried about the absence of practical details around how the £2,000 limit will be applied to weekly and monthly paid employees, and those with multiple jobs.

Lord Londesborough was similarly concerned about complexity, saying that: “This Bill and last year’s Act highlight why we need to radically overhaul—that is, simplify—our horrendously complicated tax code”.

Impact on pension adequacy

Another recurring theme throughout the debate was concern that the measure would discourage additional pension saving at a time when pension adequacy is already a pressing challenge.

The shadow minister, Baroness Neville-Rolfe, said that “The likely behavioural response it will generate risks undermining pensions adequacy.” Referring to the ‘inadequacy’ of current minimum auto-enrolment contributions, she argued that the system relies on ‘voluntary’ additional savings.

Baroness Altmann criticised what she described as a contradictory approach within government, saying: “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.”

Lord Ashcombe warned that the UK is already facing a “substantial and widening retirement savings gap”, citing the Scottish Widows Retirement Report 2025 that suggests “Only 30% of the population is currently on track for a comfortable retirement, while 39% are at clear risk of falling short.”

Baroness Kramer, Liberal Democrats Lords spokesperson for Treasury and Economy, highlighted concerns that restricting saving during peak earning years would be particularly detrimental for women who take time out for childcare.

Effects on employers

On the administrative and financial burden on employers, the shadow Treasury minister suggested that employers will be “required to track and report total salary-sacrificed pension contributions through payroll systems… calculate national insurance liabilities… and communicate clearly with employees.”

Lord de Clifford (Crossbench) said that: “The extra employer NIC would mean an additional £8,500 for our business”. He continued: “Would it not have been simpler not to bring in a change at all… or to withdraw pension payments from salary sacrifice in total, therefore making it simpler”.

Baroness Maclean of Redditch (Con) reflected on her own experience running a small business, emphasising how salary sacrifice helped SMEs compete for talent, saying “We could not compete with large employers… but we were able to offer salary sacrifice and pensions… one thing that we could do.” She cited the CIOT, saying it had found that limiting salary sacrifice will affect “basic rate taxpayers more, pound for pound, than higher and additional rate taxpayers”. She said that the change is likely to cause some employers to withdraw pension salary sacrifice as an option.

Baroness Kramer added that for small businesses, “this is just another tax rise at a time when so many other costs have been thrown on to businesses”.

Behavioural responses and further review

A number of peers questioned whether the government’s revenue forecasts accounted adequately for behavioural responses, including Baroness Neville-Rolfe and Lord Londesborough. The latter argued that the government’s forecasts of short-term revenue losses were “undercooked”.

Lord Leigh highlighted the drop in projected revenue between 2029–30 and 2030–31, suggesting that: “The amount raised by the Bill peaks at £4.845 billion in 2029–30 but then… falls to £2.585 billion in the following year”. He challenged the government to explain the assumed behavioural changes.

Baroness Maclean suggested that the government “look at amendments to protect basic rate taxpayers, index the threshold to inflation and require comprehensive review before implementation”.

Lord Altrincham (Con) stressed the importance of avoiding a policy shift that increased long-term state liabilities by reducing private pension saving, saying: “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.”

Minister's response to concerns

On the impact of the measures on employers, Lord Livermore described the government’s approach as “pragmatic”, arguing that most sectors, including retail, hospitality and leisure, have salary sacrifice contributions well below the £2,000 cap and are “largely protected”. He continued that those using salary sacrifice will still benefit from the tax advantages available up to the £2,000 cap, which includes employers, who can make up to £300 of employer national insurance contribution savings through salary sacrifice per employee.

Regarding the impact on small businesses, the minister suggested that only 10% of employees in SMEs have pension contributions through salary sacrifice exceeding the cap, compared with 18% of employees in larger firms.

About the impact on low earners, he emphasised that the Bill impacts around 35% employees who use salary sacrifice to make pension contributions, as “those earning at or near the national living wage cannot use salary sacrifice at all”.

In response to Baroness Maclean's enquiry about indexing the £2,000 cap, the minister said that the government have “no plans” to index the cap, but will keep the £2,000 level “under review”. He continued that the costings of the policy have been scrutinised and certified by the Office for Budget Responsibility, taking into account any employer behaviour changes.

On the administration of the policy, the minister reported that HMRC is engaging with a wide range of stakeholders in the payroll, employer and software developer industries to work through how the cap will be implemented. He concluded his remarks by speaking about the impact on pension savings, stating that the government “do not believe that these changes will negatively impact the overall level of pension saving”.

Next step

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

You can read the full debate here.

You can read CIOT’s briefing for parliamentarians here.