The Chancellor’s Budget will be painful for pensioners.
Under Chancellor Rachel Reeves, the pensioner NI exemption could vanish (Image: Getty)
When Rachel Reeves stands up exactly two weeks today, pensioners will be bracing themselves. They’re on the front line of her £30billion tax raid. We don’t yet know exactly what she’ll do on November 26, but the rumours are grim as she looks set to hammer pensions, savings, inheritances and homes.
It’s widely expected she’ll also take the hugely controversial step of hiking income tax. Every penny on the basic rate raises up to £10million, so a 2p hike would go a long way to plugging her £30billion black hole. It would also break Labour’s promise not to raise taxes on “working people” and trigger a furious backlash.
To dodge that political fallout, the Chancellor could lean on a workaround suggested by Labour’s favourite think tank, the Resolution Foundation. This is bad enough on the surface, but the more closely I examine it, the more alarming it becomes. I fear there may be an ulterior motive.
The Resolution Foundation proposes hiking income tax by 2p while cutting national insurance (NI) by 2p. This means working people will pay the same as before, and Reeves could sneakily claim to have stuck to that manifesto pledge.
But pensioners will pay more. Why? Because today they don’t pay NI at all. It’s the single biggest pensioner tax break. Their tax bills would rise by the full 2p in the pound with no offsetting NI saving.
Nine million pensioners now pay income tax, and that number is already rising due to frozen thresholds. If Reeves acts, they’ll take another hit.
But what worries me most is what comes next. This may only be the thin end of a very long wedge.
Until recently, NI stood at 12p in the pound. Former Tory Chancellor Jeremy Hunt cut it to 8p before the election. Under the Resolution Foundation plan, it falls to just 6p.
NI was created in 1911 to fund the state pension, welfare and the NHS. Today it’s simply income tax by another name. So why even bother?
Tax specialists, including the Institute for Fiscal Studies, have long argued that NI should be folded into income tax to simplify the system. As NI shrinks, calls to merge the two will grow louder.
That’s where Reeves gains and retirees lose. Scrapping the pensioner NI exemption and rolling NI into income tax would instantly add 6p in the pound to pensioner tax bills. It would also raise a colossal £18billion for the Treasury.
Pensioners will be furious but since they rarely vote Labour anyway, Reeves can shrug that off.
This is speculation on my part. But if Reeves does act it paves the way to abolishing the NI entirely – and with it the pensioner exemption. I suspect both Reeves and the Resolution Foundation will have thought about this. Pensioners would rather they hadn’t.
