National Insurance: Shock as Income Tax rise would see pensioners provide more revenue | Personal Finance | Finance

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Recent reports suggest that Mr Johnson and Chancellor Rishi Sunak are debating whether to hike National Insurance payments by either one or 1.25 percent. As well as criticism of the hike itself, many critics of it are calling on the Government to address this “intergenerational raid” on the younger population. Many are calling for pension pots to be taxed in order to pay for the Government’s social care plans instead.

According to the Institute of Fiscal Studies (IFS), hiking the amount paid in National Insurance by one percent would raise around £10billion a year.

It is estimated that around £8.5billion of that would come from England, while the rest would be split between Scotland, Wales and Northern Ireland which have devolved governments which deal with health and social care.

Furthermore, a raise of 1.5 percent in the basic and higher rates income tax would raise a similar amount.

While there are certain similarities between the outcome of increasing income tax and raising National Insurance, there are also key differences.

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Government figures show that £193million was raised in 2019/20 in income tax by Britons.

In comparison, National Insurance contributions raised £144million over the exact same period.

For both taxes, slightly less than half the revenue would originate from the highest-income tenth of families.

However, a rise in income tax would be more progressive as the threshold at which it starts to be paid is higher.

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Currently, the threshold for the 2021/22 tax year stands at £12,570 compared with £9,568 for employees and self-employed paying £9,568 in National Insurance.

Employers pay upwards of £8,840 for their employer National Insurance payments.

Due to income tax being paid on some investment income, those who pay it more often than not come from well-off households or are high earners.

According to the IFS, increasing National Insurance rates would incentivise Britons to work through their own company, rather than as employees.

This is so they would be able to keep their earned income as dividends rather than a set salary.

Unlike income tax, National Insurance is taxed on employee contributions to private pensions, and not state or private pension income.

On top of this, those who continue working past the state pension age of 66 do not need to pay National Insurance, however employers will still need to pay their share.

Some 23 percent of families in England continue to have breadwinners who decide to work past the state pension age.

The IFS estimates that those households would provide 14 percent of the revenue from increasing income tax rates within England.

However, the same demographic would only see a 1.4 percent revenue increase if there was a rise in National Insurance payments.

The majority of this would come from the earnings of those below the SPA whose partner is above it, rather than from taxing the earnings of pensioners themselves.

As well as this, only 0.3 percent of the additional National Insurance revenue would come from taxing the incomes of pensioners through employers, compared with 12.6 percent of the additional income tax revenue.

Stuart Adam, Senior Research Economist at IFS, believes the Government should find another course of action to address the social care crisis and leave National Insurance alone.

“There are many ways that the government could raise additional revenue to cover the costs of social care,” he said.

“Choosing to increase National Insurance rates would mean that just 1.4 percent of additional revenue came from families that contain a pensioner – who now make up 23 percent of all families.

“In contrast, these families would contribute 13.8 percent of additional revenue if the basic and higher rates on income tax were increased.”

The Government is set to outline their full plans to pay for social care in the UK this week.





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