AJ Bell’s Tom Selby cautions that Rachel Reeves’ plan to raise income tax while cutting National Insurance by 2 points would spare many workers but significantly increase taxes for retirees, with larger hits at higher incomes.
Tom Selby, director of public policy at AJ Bell, comments:
“Labour’s pledge not to increase rates of income tax, National Insurance or VAT for ‘working people’ has left chancellor Rachel Reeves playing mental gymnastics in her increasingly desperate attempts to balance the books without completely abandoning the manifesto commitments Sir Keir Starmer was elected on.
“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. Someone with a taxable retirement income of £35,000 would face a tax hike of almost £450, while a pensioner with an income of £65,000 would be stung with a tax increase of over £1,000. 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.”
How employees and pensioners could be affected by the ‘two up, two down’ proposal
Source: AJ Bell analysis based on current income tax and NI rates compared to a 2% rise in income tax rates and 2% cut to NI
Could Reeves go further on self-employed taxes?
“Depending on her desperation for extra cash and willingness to take political pain, Reeves could go even further by equalising the NI rates paid by employees and the self-employed. Notably, 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% NI on profits between £12,570 and £50,270 and 2% on profits above £50,270. Employees, by contrast, pay 8% NI on earnings between £12,570 and £50,270 and 2% on earnings above £50,270. 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.”
Check out all the thinking and insights from experts across the industry who’ve been sharing their Budget outlook with us for today’s Friday Focus here: https://ifamagazine.com/category/friday-focus/
