National Insurance ‘cuts’ could impact state pension payouts

Boris Johnson briefs cabinet on National Insurance cuts

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The 1.25 percentage points increase in National Insurance contributions only came into force in April, with the plan to then separate it into a 1.25 percent Health and Social Care Levy. At the time, former chancellor Rishi Sunak said it was necessary to raise £12billion to clear the NHS backlog caused by the pandemic and eventually pay for improvements to social care.

However, Liz Truss plans to reverse the rise in National Insurance, which would in turn benefit the poorest by just 63p a month, according to The Institute for Fiscal Studies.

She has also set out to scrap the green levy on energy bills, in an effort to reduce the soaring bills facing millions of Britons going into the colder months.

Steven Cameron, pensions director at Aegon, warned reducing NI contributions could affect the state pension.

He said: “While reversing the increase would lead to an increase in take-home pay for some, it would not make any difference to those earning under the £12,570 National Insurance threshold.

“It would also create a shortfall in NHS and social care funding which would need to be filled through other means.

“National Insurance contributions from today’s workers fund the state pensions of today’s pensioners, so the less is collected through NI, the greater the challenge of continuing to fund state pensions, which are expected to rise at a record double digit rate under the triple lock.”

The Institute for Fiscal Studies said the move to reverse the National Insurance would be worth around £150 a month to the UK’s highest earners.

Chancellor Kwasi Kwarteng is expected to announce the policy as part of a range of measures aimed at boosting economic growth in a mini-budget on Friday.

The IFS analysis found the richest tenth of households, who earn an average of £108,000, will save £1,800 – a tax cut of £150 a month.

However, the poorest 10 percent of households, who earn £12,000 a year on average, will save just £7.66 a year, or 63p per month.

The 1.25 percentage point increase came into effect in April this year, to help support the NHS in the recovery from the coronavirus pandemic.

The levy applies to contributions as employer Class 1, employee Class 1, Class 1A, Class 1B and Class 4.

Under the current policy, the levy will be in effect for one year and become a separate tax from April 2023.

Government data suggested that this has benefited around 30 million people, with an average pay rise of £330 a year.

Tom Waters, senior research economist at the IFS, told The Times: “Reversing the recent NICs rise would tend to benefit richer households more than poorer ones.

“Even as a share of their income; the richest 10th, for example, would gain about £1,800 per year, or 1.7 percent of their income, and the poorest tenth about £7 per year, less than 0.1 percent of their income.

“That’s partly just a natural consequence of the existing tax system: those towards the bottom of the income distribution don’t pay much in direct taxes, and so it’s hard to cut taxes in a way that makes a big difference to them.

“That said, there are more progressive ways to cut tax — raising the income tax personal allowance, for example, which is currently due to be frozen in cash terms until March 2025.

“Tax cuts along these lines, including a NICs cut, would of course strengthen incentives for people to move into work.”

The state pension is set to go up to more than £200 a week from next April, with the triple lock policy set to be reintroduced.

This policy guarantees that the state pension increases each year by at least 2.5 percent, or in line with average earnings or the rate of inflation.

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