Speculation is mounting that the Chancellor is looking to raise income taxes while simultaneously lowering National Insurance rates at the Budget, potentially hitting pensioners with a tax hike.
Although nothing has been confirmed, this latest rumour is that Reeves will increase income tax by 2 percentage points and lower NI by the same degree. But commentators have pointed out that any such move would particularly hit retired people, who don’t pay NI on income or any earnings.
Tom Selby, director of public policy at AJ Bell suggests that Labour’s pre-election pledge not to increase rates of income tax, National Insurance or VAT for ‘working people’ could leave some wriggle room for the Chancellor as she looks to balance the books in next month’s Budget.
He says: “This contortionist act now appears to be circling the idea of a ‘two up, two down’ shift in income tax and National Insurance rates. While this would be a clear breach of Labour’s promise not to raise income tax rates, Reeves could still claim to be protecting the pay packets of ‘working people’ because a similar NI cut would effectively cancel out the impact for employees and the self-employed, assuming it is applied across the board.
“However, this would not be the case for retirees, who are not subject to NI and so would be clobbered under the plans.”
He points out that a pensioner with a taxable retirement income of £35,000 would face a tax hike of almost £450, while a one with an income of £65,000 would be hit with a tax increase of over £1,000.
He adds: “While hitting pensioners in the pocket will clearly be unpopular – particularly in the wake of the Winter Fuel Payment fiasco – it may be viewed as the least bad option to raise a chunk of the tens of billions of pounds the chancellor needs to balance the books.”
Selby adds that Reeves go further on self-employed taxes, by equalising NI rates paid by employers and the self-employed. He points out that this is something pensions minister Torsten Bell, an increasingly influential figure in government, previously advocated at the Resolution Foundation before entering Parliament.
Currently, self-employed workers pay 6 per cent NI on profits between £12,570 and £50,270 and 2 per cent on profits above £50,270.
Employees, by contrast, pay 8 per cent NI on earnings between £12,570 and £50,270 and 2 per cent on earnings above this.
He adds: “If the NI cut was not applied to the self-employed in the same way, there would be less cushioning effect from the proposed 2p income tax rise.
“The government would face accusations of being anti-growth if it attacked the self-employed in this way, but in a world of increasingly tough fiscal choices that may be viewed as a price worth paying.”