How national insurance could balance the UK Budget 2024

The Budget is fast approaching and along with it comes the quickening pulse of some taxpayers as they face the prospect of anticipated tax hikes. Whilst the anticipation may be building, at the rate the Chancellor is going there won’t be many taxes left to actually raise. As the days go by, more and more options, like a potential wealth tax and restrictions to tax relief on pension contributions, are either being categorically ruled out or are now reportedly off the table.

In her recent conference speech, Rachel Reeves repeated the manifesto pledges that the rates of income tax, National Insurance contributions (NICs) and VAT would not be increased for working people. Similarly, she reiterated that corporation tax would be capped at its current level for the duration of this parliament. Some had taken the broad silence on corporation tax rates since the election to be an ominous one but perhaps they should not be surprised. As we have noted previously, the Labour party has never increased the headline rate of corporation tax in the past and has in fact reduced it on three occasions. 

Nevertheless, winter is coming for taxpayers and not just those that have had fuel payment allowances stripped away. Those that expect any tax increases to fall solely on the wealthiest in society are likely to be sorely disappointed. Note the Chancellor’s own words in her conference speech that voters have been “burned too often by politicians who put ideology, party and self-interest over the interests of the British people”. Expect political pragmatism, rather than idealism, and at least one key tax rise that impacts the many, not just the few.

If the Chancellor cannot raise the desired tax receipts from wealthier taxpayers alone and will not raise it directly in higher tax rates for workers, there are few options left to carry the burden of the Budget deficit. NICs may hold the key to unlocking the finances Ms Reeves is looking for. There are a number of options that she could look at:

• Increase employers’ NICs: by far the simplest measure that the Chancellor could take would be to simply increase the rate of NICs paid by employers by 1%. HMRC’s figures estimate that it would raise £8.45bn in the 2024/25 tax year. However, whilst it would not strictly represent a tax on ‘workers’, it would clearly be a tax on ‘jobs’. The impact of such a rise could indirectly flow through to salaries and stifle growth of companies.
• Apply employers’ NIC to pension contributions: an arguably more controversial step to take would be to apply employers’ NIC to pension contributions made for employees. HMRC estimates the cost of not charging NICs (both employers’ and employees’ NIC) on pension contributions made by employers was £25.3bn in the year to 31 March 2024. Previous research also suggests that only around 40% of adults appreciate that pension contributions benefit from a government top-up through tax relief. Applying employers’ NIC to pension contributions would be an unpopular measure but perhaps one that is an easier target than others, as many do not realise they benefit from the tax relief in the first place.

There are other potential options that might be explored, such as seeking to apply NICs to income from investments such as savings or rental income. However, those are likely to prove a step too far in this Budget and could hit pensioners hardest who rely on such income. A longer-term move in the same direction of the previous government in reducing NIC rates, with a likely corresponding increase in income tax, might achieve the same thing in a less obvious way if that is a future policy objective.

The Chancellor appears to be learning the lesson quickly that raising taxes may not be quite as simple as it looks from the opposition benches. The danger of introducing lots of small changes in the Budget is the increased opportunity for missed pitfalls and potential U-turns. A single larger measure on NICs, effectively reversing some of the previous government’s cuts, might prove to be the easier way forward politically.