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.