Tom Selby, director of public policy at AJ Bell, comments: “Chancellor Jeremy Hunt’s big Budget announcement of a further 2p cut in employee National Insurance could be just the beginning, with the Conservatives reportedly eyeing plans to abolish the tax altogether if they win the general election. Given yesterday’s 2p cut amounts to the best part of £10 billion a year, this would clearly come at a colossal cost to the public purse.
“Ditching employee NI would simplify the system, leaving most people subject to income tax on their earnings alone. However, it would also inevitably place pressure on the government to hike other taxes, including potentially income tax, in order to fill the void.
“There are also practical implications that would need to be thought through. For example, the current state pension system is centred around the NI framework, with workers building up entitlement to the benefit based on their NI contribution record. Scrapping NI would therefore require a new system of NI credits to be introduced, assuming the state pension remains in its current form.
“There would also be implications for pensions ‘salary sacrifice’ arrangements, which allow savers to lower their NI bills in addition to benefitting from pension tax relief. Clearly if employee NI no longer existed, the benefit of salary sacrifice would be significantly reduced.”
Would scrapping employee NI mean the end of the state pension?
“While there is a notional split in government accounts between NI receipts and other government tax receipts, this is entirely illusory from a practical perspective. In reality, National Insurance simply forms part of the general tax pot.
“If this weren’t the case, the government would be making drastic cuts to various benefits, including the state pension, in order to make its sums add up. In fact, the state pension is set to rise by a bumper 8.5% in April as a result of the triple-lock, with both Labour and the Conservatives expected to recommit to the policy in their election manifestos.
“So while lowering NI means less income for the Treasury, it should not have a direct knock-on impact on things like pensions and benefits. Of course, it is possible that by reducing the overall tax take, the government has to make savings elsewhere, but these are as likely to fall on other areas of public spending as they are pensions and benefits.”
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