What difference a cut to income tax rates or National Insurance?

21 November 2023

With speculation rife that the Chancellor will cut either income tax or National Insurance in the Autumn Statement, Steven Cameron, Pensions director at Aegon considers the impact of each.

There is rampant speculation that the Autumn Statement will cut either income tax or National Insurance.

While on the surface, a cut of 1% in income tax would have similar impact on employees as a 1% cut in employee National Insurance, there are other considerations in the mix.

Employers also pay National Insurance. A cut in both employer and employee National Insurance rates would offer some support for businesses, which the Chancellor is believed to be keen to offer.

Those over state pension age (currently 66) don’t pay National Insurance but are subject to income tax. So opting to cut National Insurance rather than income tax would not benefit those over age 66.

Income tax rates and thresholds are devolved, with the Scottish Government setting its own levels, other than the personal allowance. So a cut in income tax rates announced by the UK Government would not benefit Scottish residents unless the Scottish Government followed the lead of the UK Government when their budget statement is delivered in December. But a National Insurance cut applies across the UK – so any cut would apply equally in Scotland. This will likely be in the Chancellor’s mind with a general election next year.

Pension contributions benefit from tax relief at an individual’s highest marginal rate of income tax. If the income tax rate is cut, so too is pensions tax relief. A cut in National Insurance would not affect pension tax relief.

Last but not least, National Insurance is supposed to cover the cost of certain benefits, most notably the state pension. With an ageing population and the triple lock formula leading to record increases (with the latest uprating expected to be announced in the Autumn Statement) cutting National Insurance will make the state pension even less affordable without cross-subsidies from general taxes.

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