Tory threat to the state pension

The Conservatives have announced a £46bn unfunded plan to scrap national

insurance contributions (NICs), but they have been unable to explain how they will
pay for it, or the impact it will have on the state pension.

Their plan poses a serious threat to pensioners, who will want to know whether their
entitlement to the state pension will be affected.

Entitlement to the state pension is based on people’s contributions during their

working life, via NICs and abolishing national insurance has wide implications for the
pensions system as we know it, severing the link between contributions and
pension entitlement. It is not clear what would be the basis for state pension
entitlement without NICs.

With NICs earmarked to fund state pensions, and the rest helping to pay for the NHS.
Scrapping employee NICs would pose a £46bn threat to the funding of state
pensions and the NHS.

By reducing resources to pay for the state pension (and NHS) and by undercutting
the basis for entitlement, the Tories approach to National Insurance poses a threat to
working people, who will want to know whether the years of NICs they have been
paying will provide them with security in retirement.

If, in fact, the Tory plan is to merge income tax and National Insurance, then Labour
analysis shows that pensioners could face an £800 tax hike, more than wiping out
gains from the triple lock over the last 14 years. This would arise if a new merged
system levied taxes on the income and savings of pensioners, equivalent to those of
working age.

The Conservatives will not explain the type of changes they are planning, but they
expect working people and people who have worked hard all their lives to foot the bill.
There are ten serious questions the Conservatives need to urgently answer.

The Tory pension bombshell in numbers

£800: The tax hike pensioners could face, more than wiping out gains from the triple
lock over the last 14 years, according to Labour’s new analysis.

£1,000: The amount the average taxpaying pensioner will be worse off a year due to
income tax threshold freezes.

£24,700: Any pensioner with an income greater than this would see the potential
income tax hike wiping out all the gains from the triple lock since 2010.

Ten questions the Conservatives must answer

1. NICs can only be spent on the National Insurance Fund, the majority of which
is spent on state pensions, or the NHS. Will the NHS budget or state pensions
be cut to pay for scrapping NICs?
2. Scrapping employee NICs will cost £46bn and you have not said how you will
pay for it. It can only be funded by higher taxes, higher borrowing, or spending
cut – which one will it be?
3. A big change like this will make many people, who’ve worked hard all their life
and paid into the system, worry about their state pension. With the £46bn cost
of scrapping employee NICs, how will you fund their state pensions going
forward?
4. And, given that someone’s entitlement to the state pension is determined by
how many years they have been paying NICs, what will happen for people
who are not yet retired? Will they still receive the state pension they have been
paying towards or will their entitlements change?
5. If there is no longer a link between national insurance and pension
entitlement, will those who have not contributed through working or caring be
able to claim a full pension in future?
6. Is the Conservative plan to merge national insurance and income tax, a move
that would see pensioners paying more tax on their income and savings?
7. Nine million pensioners pay income tax on their pension income already. So,
will these pensioners face further tax rises to fund your NICs plan?
8. Are you considering alternative funding sources for the state pension
altogether? Abolishing NICs would mean losing funding equivalent to around 3
million state pensions.
 9. Do these plans to heavily alter the pensions system mean you are no longer
committed to the triple lock?
10. If the connection between contributions and entitlement is broken, will you
means test the state pension?

The sums the Tories don’t want you to know

Labour’s new analysis of Tory plans

Labour Party analysis reveals that replacing NICs revenue with a higher basic and
higher rate of income tax would mean rates of income tax going up by 6.5%. That
means for a retired pensioner with an income of £25,000 from a mix of private and
state pension paying an extra 6.5% on their income above the £12,750 personal
allowance. This would mean paying over £800 (£808) more in income tax.

As below HMRC’s ready reckoner suggests removing NICs for employees and the
self-employed would cost around £46 billion.

HMRC’s ready reckoner suggests that in 2024/25:

• a 1%-point increase in the basic rate of income tax would raise around £6
billion
• a 1%-point increase in the higher rate of income tax would raise around £1.25
billion
• a 1%-point increase in both the basic and higher rates of income tax would
raise around £7.25 billion.

The state pension has increased by approximately £780 more than if it had gone up
by earnings since 2010 – these gains will be wiped out under Tory plans.

Unfunded NICs plan

Jeremy Hunt has said he wants to abolish national insurance contributions (NICs). In
an email to Tory members he said “I’d like to end the unfairness where people in work
are paying tax twice on their earnings”. Treasury Minister Bim Afolami confirmed this
in an LBC interview on 6 March 2024.
After Hunt’s changes main rate NICs will be 8%. Self-employed NICs will be 6%. The
Treasury’s policy costings table (Table 5.1)i reveals that a 2p cut to main rate
employee NICs costs £9.99bn in 2028/29, and a 2p cut in main rate self-employed
NICs costs £760m.

In addition, according to HMRC, it costs £1.45bn to cut the employee additional rate
by 1p, and £270m to cut the self-employed additional rate by 1pii

In total Jeremy Hunt wants to deliver £46bn of unfunded tax cuts:

• £39.96bn to abolish employee NICs main rate, going from 8p to 0p

• £2.28 to abolish self-employed NICs, going from a 6p rate to 0p
• £2.9bn to abolish employee NICs additional rate, going from 2p to 0p
• £0.54bn to abolish self-employed NICs additional rate, going from 2p to 0p

That is £1bn more than the £45bn of unfunded tax cuts in the disastrous Truss mini-
budget.

Impact of threshold freezes

Resolution Foundation analysis shows that, by 2027-28, the average taxpaying

pensioner will be around £1,000 a year worse off from income tax threshold freezes.iii

The National Insurance Fund

Around 80% of NICs receipts go the National Insurance Fund (96% of which pays for
pensions) and 20% goes to the NHS.iv Creating a different system with NICs abolished
would mean this source of revenue would no longer be guaranteed for pensions and
the NHS.

This would put around £35bn of funding for the state pension at risk.

https://assets.publishing.service.gov.uk/media/65e8578eb559930011ade2cb/E03057752_HM
i

T_Spring_Budget_Mar_24_Web_Accessible__2_.pdf
ii
https://www.gov.uk/government/statistics/direct-effects-of-illustrative-tax-
changes/direct-effects-of-illustrative-tax-changes-bulletin-january-2023#national-
insurance-contributions-rates
iii
https://www.resolutionfoundation.org/publications/back-for-more/
iv
https://www.gov.uk/government/publications/report-to-parliament-on-the-2024-re-
rating-and-up-rating-orders