Last week, Government ministers reportedly began exploring plans to increase National Insurance (NI) contributions by one percent in order to pay for social care reforms. The rumoured proposal is part of the Government’s effort to address the health and social crisis in the UK and could raise upwards of £10billion, according to estimations.
If the policy was to become law in Parliament, the average employee rate for NI on earnings under £967 per week could rise from 12 percent to 13 percent.
NI contributions are only paid by those under the country’s state pension age of 66.
Prime Minister Boris Johnson has been criticised for waging an “intergenerational war” on young people with the reported proposal.
Tom Selby, a senior analyst at investment platform AJ Bell, outlined why such a proposal could leave the Government vulnerable to criticism against the working age population
“It is not yet clear what Prime Minister Boris Johnson’s long-term care solution will look like.
“Hiking National Insurance contributions would be the simplest way to fund this reform as it utilises the existing tax framework.”
Other organisations, such as The Resolution Foundation have advocated for an increase in Income Tax to pay for NI.
The economic think tank said: “Our social care system is a national disgrace, so the Government is right to recognise it needs more funding and to be honest with the public that this means higher taxes.
“But raising National Insurance is a terrible way to go about it. It asks younger and lower-paid workers to contribute more than older and wealthier people, compared to a fairer rise in Income Tax.”
Further speculation has arisen on how Government reforms on raising Income Tax or NI could impact pension tax relief.
This particular tax relief comes in the form of a top up from the Government to taxpayers when saving into a pension.
Pension tax relief is only eligible to those who are under 75 and make a gross contribution of up to the higher of an individual’s UK relevant earnings or £3,600 gross.
Currently, basic-rate taxpayers get 20 percent pension tax relief, while higher-rate and additional-rate taxpayers receive 40 percent and 45 percent on pension tax relief.
Nigel Peaple, the Director of Policy and Advocacy at the Pension and Lifetime Savings Association (PLSA), criticised the way pension tax reform is being discussed, specifically in relation to scrapping Higher Rate pensions tax relief or introducing a new Single Rate of 25
Mr Peaple said: “Under the worst scenario assessed by the PLSA, a person who pays the higher rate of Income Tax for almost all of their working life could see a reduction of over 20
“While it might seem reasonable to reduce tax relief for the 13
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