As the Budget draws closer, the definition of “working people” is getting narrower. Sir Keir Starmer has made it clear that people who own shares and rental properties will be fair game for a tax raid, regardless of whether they work or not, but has insisted that those who go “out and earn their living” will be protected.
Yet even this is misleading. Rachel Reeves is expected to use this week’s Budget to increase employers’ National Insurance contributions, which are paid on wages. The measure is set to be the largest revenue-raising change in the Budget, netting £20bn.
The Chancellor has also considered raiding the retirement savings of workers by introducing National Insurance on the contributions employers make to pension pots.
Business leaders and politicians warn that both measures will hit working people by making it harder to get a job and dragging on wage rises.
Companies paying the minimum wage and making the legal minimum contributions to pensions under auto-enrolment cannot offset the cost of a higher National Insurance bill either through lower wages or by cutting back pension contributions. Hiring fewer people – or even sacking staff – may be the only alternative. People in low-wage jobs such as hospitality and retail are therefore likely to feel the sting.
When former chancellor Jeremy Hunt cut the headline rates of National Insurance, officials said it would add the equivalent of almost 200,000 full-time staff to the workforce. By contrast, raising employers’ National Insurance would be expected to lead to fewer jobs.
Tina McKenzie at the Federation of Small Businesses (FSB), says she wants tax-cutting measures to encourage employment, not a national insurance raid.
“It’s crucial that the Chancellor avoids making it more expensive for small businesses to employ people,” she says. “There’s no doubt that hiking jobs taxes on small employers would lead to hiring freezes – or worse – and would make pay rises less affordable, if money which could go to workers is instead syphoned off into the Treasury.”
Those in higher paying jobs would feel the pinch too. Employers are likely to recoup the cost of an increase in their National Insurance bill either through smaller pay rises or raising their prices. Both would hit working people.
Experts and politicians from across the political spectrum have warned that a National Insurance raid on pensions would leave private sector workers poorer in retirement, widening an already large savings gap with the public sector and leaving Labour open to the charge that their idea of “working people” effectively means just state employees.
Baroness Altmann, a former pensions minister, says: “It is so jaw-dropping and so outrageous I cannot quite believe it. You are making private sector workers pay more money for the pensions of people who have already got better arrangements than them, and possibly have worse arrangements for themselves as a result. It is just astonishing.”
Alex Hall-Chen, at the Institute of Directors, says such a tax increase does not fit with the Government’s attempt to argue that “working people” will escape pain in the Budget. She says: “The likely result of National Insurance on employers’ pension contributions will be to reduce the generosity of employers’ pensions benefits and salary sacrifice schemes. The knock-on impact will therefore be borne by workers through a reduction in their pensions savings.”
Sir Iain Duncan Smith, the former work and pensions secretary who oversaw the introduction of auto enrolment in the coalition government, says such a tax raid would be “bloody appalling” with ramifications for decades to come. “This will be an absolute, unmitigated Labour disaster which will damage lives in future and will mean the cost and burden to the state will grow in the future, not be diminished, because there will be fewer savings,” he argues.