EXCLUSIVE: Financial experts at AJ Bell have given their verdict on proposed changes to National Insurance and Income Tax which would hit pensioners.
Rachel Reeves could raise taxes on pensioners in her upcoming budget (Image: Getty)
Financial experts have weighed in on the prospect of an income tax hike for state pensioners that analysts fear could hit retirees with a bigger tax bill in Rachel Reeves’ looming autumn budget.
This morning, the Express reported how state pensioners could be made to pay National Insurance in a roundabout way, by reducing National Insurance rates by 2% and increasing Income Tax rates by 2% instead.
This would not affect most working people, who would see one part of their tax fall by the same amount another rises.
But state pensioners, as well as landlords and the self-employed, don’t pay National Insurance, but they do pay Income Tax, so they’d effectively be dealt a 2% tax hike.
The suggestion was put forward by The Resolution Foundation this morning (Tuesday, September 23). The think tank was headed up by Torsten Bell between 2015 and 2024, the man who is now serving as Pensions Minister in Sir Keir Starmer’s government.
The Foundation’s suggestion could well be adopted by Rachel Reeves in her upcoming Autumn Budget as the government seeks more ways to raise tax revenue, though this is not yet confirmed.
The Foundation’s report says: “The Chancellor should protect workers’ pay packets and level the playing field on how different forms of income are taxed – including a 2p cut in employee National Insurance (NI) offset by a 2p rise in Income Tax (IT) – in order to raise £6 billion in a Budget that will require significant tax increases, according to major new Resolution Foundation research published today (Tuesday).
“The Foundation says that the previous Chancellor Jeremy Hunt rightly identified an unfair double tax on work from employee NI and IT, and the current Chancellor should continue to tackle this unfairness by switching the UK’s tax base away from the former and onto the latter. Such a switch would raise £6 billion from those who pay IT but not employee NI – including pensioners, landlords and the self-employed.”
Now, financial experts at AJ Bell have given the Express their verdict on how likely it is that this could be implemented.
Rachel Vahey, Head of Public Policy at AJ Bell, told the Express: “Judging by the number of rumours currently circulating, the government is scrambling around looking for solutions to its current financial woes ahead of the Budget in nine weeks’ time.
“However, in all the discussions it has stuck fast to its central pledge not to raise taxes for ‘working people’.
“Having put so much store by this promise, it’s hard to envisage it reversing its stance. Even though a reduction in National Insurance contributions would cancel out the pain of a 2p increase in Income Tax for most people, it will mean those who currently pay lower or no National Insurance – for example pensioners, landlords and the self-employed – ending up with a bigger tax bill overall.
“If the government wanted to adopt the Resolution Foundation’s suggestion, it would need to be super confident that this would not cross the line in hurting ‘working people’. But regardless of this, no government would welcome headlines screaming a 2% hike in Income Tax rates, even if, for most people, it had no effect.”
Adam Corlett, Principal Economist at the Resolution Foundation, said in its report: “Policy U-turns, higher borrowing costs and lower productivity growth mean that the Chancellor will need to act to avoid borrowing costs rising even further this autumn. Significant tax rises will be needed for the Chancellor to send a clear signal that the UK’s public finances are under control.
“Any tax rises are likely to be painful but given the fallout from the recent employer NI rise, the Chancellor should do all she can to avoid loading further pain onto workers’ pay packets.
“She can do this by switching our tax base away from employee National Insurance and onto Income Tax, which is paid by a far broader group in society. This should form part of wider efforts to level the playing field on tax, such as ensuring that lawyers and landlords face the same tax rates as their clients and tenants.
“These sensible reforms would raise revenue while doing the least possible harm to workers and the wider economy. And by acting decisively, the Chancellor can turn her full attention back onto securing stronger economic growth.”
