The Chancellor of the Exchequer Rachel Reeves delivered the Autumn Budget today. Our experts dive deeper into the announcements, giving their immediate analysis on what impact they could have on employers, employees and the pensions industry.


The impact of National Insurance (NI) hikes on employer costs and employee benefits

Martin Willis, Employer Consulting Partner

“A 1.2% increase on NI will understandably tighten the purse strings for businesses - particularly the £5,000 lower threshold which will see businesses now paying 15% on roughly £4,000 for the vast majority of their employees.

The real losers here will be those at the receiving end of any cost-cutting exercises employers may take. Businesses will have to recoup the savings made on this relief from somewhere, with employer pension contributions potentially in the firing line. 
 
In a complete turn of events, rather than the death of salary sacrifice, we’re now looking at a scenario where it becomes a no-brainer as it offers increased savings to employers. Whilst employees won’t see any additional NI saving - unless their employer shares any of the savings - the potential to move into lower tax and benefit assessment brackets will only become more relevant as people feel the squeeze from suppressed salary increases and increasing costs of goods and services."


Changes to inheritance tax creates uncertainty, with key questions left unanswered

Martin Willis, Employer Consulting Partner

“Bringing people’s pensions into the inheritance tax umbrella is certainly a sensitive subject, and it’s clear the Chancellor isn’t pulling any punches when it comes to hitting her £40bn tax hike target.

It’s an emotive issue, but ultimately, we’re discussing assets after the individual has passed away. Pensions were never meant as tools for inheritance tax planning, so one might argue that tax should be levied once pensions are converted into income. In many ways this change will be reminiscent for many of times before the Pensions Freedoms Act in 2015, prior to which benefits in drawdown were taxable.
 
However, there are many technical questions which must be answered. It's unclear how this will interact with the Lump Sum and Death Benefit Allowance (LSDBA), and inherited drawdown funds which will be taxable as income when withdrawn. And what happens when the pensions funds have to be withdrawn/taken as a taxable lump sum in order to fund the inheritance tax bill? Will there be an expectation that pension schemes will pay inheritance tax to HM Revenue & Customs (HMRC) before the distribution of death benefits? We must hope these questions have already been answered, rather than leaving savers in limbo for the weeks ahead." 


No return to the gilt crisis, but supply and demand questions remain

Ian Mills, Partner and Head of DB Endgame Strategy

Following the Chancellor's budget announcement yesterday, we have seen a steady rise in gilt yields. This has not been a surprise as the Chancellor indicated an intention to issue more gilts than previously expected by the market.
 
Basic supply and demand principles suggest that when supply goes up this tends to push down prices, and as yields and prices are inextricably and inversely related, yields are likely to rise as a result. 
 
Demand for gilts will tend to be affected by considerations around inflation and growth. If inflation is expected to rise, gilt buyers will demand a higher yield for the greater expected real-terms devaluation of their capital. If growth is expected to be higher then investors will demand higher yields on gilts because other investments become more attractive. According to OBR analysis, this budget is broadly neutral on growth but is slightly inflationary. This could place further upward pressure on yields from a demand perspective.
 
The big question, however, is who is going to buy all these gilts? For the last twenty years or so UK DB schemes have been buying gilts at almost any price. They are, however, now generally very well-funded and own pretty much all the gilts they will ever want to buy. The danger for the Treasury here is that when a DB scheme buys-out most of those gilts ultimately are sold (either by the scheme to pay a cash premium) or by the insurer as they redeploy assets into higher-yielding investments. This could apply further upward pressure on yields from declining pension scheme demand over the next few years. Our view is that this will be felt most keenly in the long-end of the curve and especially in the index-linked market where there are few other natural buyers.
 
The memory of the 2022 mini-budget, which saw rising yields trigger a liquidity squeeze for many DB pension schemes, is still fresh. However, three key differences this time around reduce the likelihood of similar repercussions:
 

  1. The Chancellor involved the OBR in this process, so that investors have independent analysis of the impact of the budget on which to base their decisions. In 2022 the lack of this analysis led to an uncertainty premium feeding into yields.
  2. Gilt yields had been rising significantly in the months preceding the 2022 budget, whereas this time they were not materially different to six months prior. In 2022 the rise in yields was already starting to squeeze some schemes' liquidity even before the budget.
  3. DB schemes and their asset managers have learnt their lesson - they (generally) went into this budget with far higher targeted levels of liquidity than they did in 2022.

 
In short, fears of a repeat of the 2022 gilt market crisis are not justified.


Rising employer NI brings risks to employee benefits and business stability

Julia Turney, Partner and Head of Platform and Benefits

“The government's decision to increase employer NI is a difficult pill to swallow for businesses in the UK. This might turn out to be a short-sighted move which could have serious implications for employee benefits and public health.

Many employers currently use the savings they receive from National Insurance relief to boost pension contributions or fund additional benefits like healthcare and life assurance. Increasing NI on employers will put strain on funding of ancillary benefits."


The government pushes for fairer workplaces and job market stability with new employee protections

Julia Turney, Partner and Head of Platform and Benefits

“In a budget full of tricks, one possible treat for British workers is the announcement of new protections against unfair dismissal and workplace bullying, as well as better access to paternity and maternity leave. These measures demonstrate a commitment to creating safer, fairer workplaces that support the well-being and security of working families.

Additionally, the proposed 'Get Britain Working' white paper, along with initiatives to combat fraud and tax avoidance, signal the government’s intent to increase stable employment while protecting public funds. By potentially reducing strain on the benefits system, these steps aim to build a stronger, more resilient job market. However, the impact of these policies will depend on how effectively they are put into practice.”


Independent schools face triple blow of new VAT, rate relief loss, and higher NI

Martin Willis, Employer Consulting Partner

"They say bad news comes in threes, and after significant cost increases due to the Teachers Pension Scheme, we now know that independent schools will not only have to absorb the planned introduction of VAT on fees and loss of business rate relief, but also the increased National Insurance rate for employers.

The lowering of the secondary threshold means that as well as an additional 1.2%, these schools will have to pay 15% on £4,100 of earnings for the vast majority of their staff. This will doubtless be hugely challenging for many independent schools trying to balance their finances."


Pension changes to impact early withdrawals and inheritance tax planning

Martin Willis, Employer Consulting Partner

"The shifting of pensions into the inheritance tax umbrella could definitely prompt people to retire early. People have been using pensions as an estate planning vehicle for the best part of a decade, and this could encourage them to retire and withdraw quickly at the lesser rate of tax - even if this needs to be drip fed up to the higher rate threshold. The popularity of trusts is likely to skyrocket as a tool for mitigating the impact of inheritance tax.

However - the pension tax environment remains advantageous in many ways, and these huge decisions should not be taken lightly. Taking advice and avoiding knee-jerk reactions remain critical."


The Autumn Budget 2024 has introduced a complex web of challenges for employers and independent schools, which will require innovative solutions and adaptability to navigate. Our experts will continue monitoring the outcomes and provide further insights on LinkedIn.

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