Chancellor Jeremy Hunt’s National Insurance (NI) cuts, which come into effect tomorrow, offer an immediate and welcome boost to take-home pay for employees. But as the dust settles on this Autumn Statement decision, Aegon’s Pension Director Steven Cameron flags potential implications for individual finances and the future funding of the state pension and current triple lock.
“The NI cut offers a welcome New Year boost for millions of employees, offering some relief to the cost of living challenge.
While positioned as a ‘tax’ cut, National Insurance operates differently from income tax. First, individuals above state pension age (currently 66) are already exempt from paying NI. So they won’t see any difference to their finances. Second, unlike income tax rates which are set by devolved Governments, the NI change will benefit those across the UK including those in Scotland, many of whom face an income tax hike come April. Third, the NI cut doesn’t affect the generosity of pensions tax relief. Had income tax been cut instead of NI, pensions tax relief would have been reduced accordingly.
But however welcome the NI cut is short term, it does raise concern over how state pensions are funded. Today’s state pensions are paid for from the NI of today’s workers. The cut will mean less NI receipts even though the state pension is increasing by 8.5% in April, more than double the current rate of inflation. Our ageing population, combined with the current triple lock mechanism, means the costs of state pensions are rising sharply. Reducing NI contributions, their primary source of funding, adds to the challenge, potentially requiring alternative state pension funding sources from general taxation in future.”
