Rachel Reeves has all but confirmed that she will hike national insurance payments for employers in this month’s Budget as she seeks to push up tax revenues in order to improve the public finances.
The Chancellor insisted that the proposed move would not breach her promise not to increase taxes on “working people” in the clearest indication yet that it is one of the ways she will balance the books – despite concerns it could impose extra costs on business and slow the economy.
Speaking at a Government investment summit in London, Reeves also insisted she would not back down on the controversial cut to winter fuel payments but claimed that a higher state pension would make up for it.
The Chancellor has warned she will have to increase taxes and cut public spending at the Budget on 30 October, claiming the Conservatives had left a £22bn black hole that needs to be filled.
But, in the party’s general election manifesto, Labour said it would not raise the rates of the three main taxes paid by “working people” – income tax, national insurance and VAT – and also ruled out any increase in corporation tax.
Paul Johnson, director of the Institute for Fiscal Studies, said on Monday that hiking employers’ national insurance contributions would be “a straightforward breach of a manifesto commitment”.
But in her heaviest hint yet that she will implement the move regardless, the Chancellor said: “Our manifesto was really clear… It says ‘working people’, and then lists those three taxes paid by working people. We are going to stick to those manifesto commitments we made, including the manifesto commitment for business on corporation tax, which we will cap at 25 per cent.”
Defending her plans to raise tax more broadly, Reeves added: “The precondition for investment in Britain is returning economic, fiscal stability to our economy. Businesses say to me that that is essential, but you get the balance right between closing that budget deficit and filling that black hole, and also encouraging the investment and wealth creation that we need to see in Britain.”
One option would be to raise the rate of the levy paid on all salaries, while another would involve charging national insurance on the pension contributions made by companies on behalf of their staff.
A 1p increase in the rate of national insurance contributions paid by employers would raise at least £16bn a year, Mr Johnson estimated, although economists have warned it would make businesses more reluctant to hire.
Tom Selby, of pension advisers AJ Bell, said: “This would effectively be a tax on businesses and there are a number of options open to those businesses to deal with that extra cost.
“They could adjust remuneration deals, for example by scaling back pay awards or reducing pension contributions, or both. Contracts may prevent immediate reductions in pension contributions but you’d naturally expect firms to review the generosity of pension arrangements if the cost of those arrangements became more expensive.”
Jamie Jenkins of Royal London added: “Some employers may reconsider the pension offering if they feel they need to make savings elsewhere, or they may simply absorb the change and pass on the extra cost through reduced salary increases in future.”
Conservative leadership contender Robert Jenrick hit out at the move, saying: “This is the strongest indication yet that Labour will break another manifesto pledge. All tax is ultimately paid by working people. The prospect of this tax on jobs is already scaring away investors and hurting our economic recovery.”
The Resolution Foundation has warned that to avoid having to make any spending cuts in the Budget, the Government will need to raise an extra £20bn of revenue. But Sir Keir Starmer dismissed reports that capital gains tax could rise as high as 39 per cent, up from a maximum of 28 per cent now, telling Bloomberg the suggestion was “wide of the mark”.
Reeves said she was not prepared to compromise on the controversial decision to remove winter fuel payments from most pensioners, warning: “There is still a gap between the black hole we inherited and what we would need to do to close that black hole.”
But she promised pensioners would still be better off as a result of a state pension that is £900 higher this year than it was last year and will rise again next year. The Chancellor said: “I will announce the increase in next year’s state pension at the Budget, but it’s likely to be in the region of £450 more next year.
“So you can see, because of the commitment to the triple lock, the state pension will go up by more than winter fuel every year.”
Jamie Jenkins, director of policy at Royal London, said: “Clawing back some of the employer NI savings on pension contributions will be unpopular with employers, particularly where that saving has been baked into their underlying finances, but it is unlikely to cause much, if any, disruption to employees in terms of their retirement saving.
“Some employers may reconsider the pension offering if they feel they need to make savings elsewhere, or they may simply absorb the change and pass on the extra cost through reduced salary increases in future. This would clearly have an indirect effect on employees, but would not be felt as sharply as an immediate change to their take-home pay, as could be the case for other changes.”
She also warned water companies that they must use all the revenues they get from higher consumer bills to invest in their infrastructure – rather than paying higher dividends to shareholders or bonuses to their bosses.
Reeves said: “I think water regulation has failed in the past, and that’s why we’re in the mess we are in today. Investment was not prioritised by the regulators, and as a result we haven’t built any new reservoirs for something like 30 years in Britain and the infrastructure is crumbling, so that’s why we are in the state that we are in today.”
At the investment summit, Business Secretary Jonathan Reynolds promised to step up economic relations with China despite national security concerns. He said: “If you look at the UK’s level of engagement with China over the last few years, compared to even the US or other G7 countries, we are an absolute outlier for how little we have done.”
The minister ruled out following the EU in imposing tariffs on Chinese-made electric cars, saying: “I do think, even where you have got more difficult concerns about some of that strategic competition, engagement in itself is a good thing.”