Pensioners, savers and landlords will bear the brunt if Labour hikes income tax rates.
Rumours circulating suggest Rachel Reeves is considering a ‘two up, two down proposal’, which would see income tax rise and National Insurance rates lowered by 2 percentage points.
Although an increase in income tax would breach Labour’s pledge to not tax “working people”, employees would not see any change in their tax take as the NI cut and income tax rise would essentially cancel each other.
However, analysis by AJ Bell found because retirees do not pay NI, someone taking a retirement income of £35,000 would see their overall annual tax bill rise by almost £450 under the proposal.
Antonia Medlicott, founder of Investing Insiders, said the groups most impacted by this kind of move will be those who will not benefit from the mitigating effect of a cut in national insurance.
This would include pensioners, landlords, those who rely on investment income, and some self-employed individuals, who are liable for income tax but do not need to make NI contributions.
She added: “Adjusting the balance between income tax (which affects everyone) and NI (which affects only workers) could be seen as an attempt to rebalance the tax burden towards older and wealthier demographics.
“Politically, that could be framed as correcting a system that overtaxes work and undertaxes wealth gained elsewhere.
“But, for the millions who rely entirely on their state pension, and who are facing the prospect of needing to pay income tax on it for the first time ever due to rising inflation and frozen tax thresholds, news of tax rises will no doubt create additional worry.”
‘Granny is off limits’
Ross Lacey, director at Fairview Wealth Management, highlighted how from on optics perspective it was generally easy to target landlords and investors for more tax without the stigma, “given the misconception that these must be the rich and they have the broadest shoulders”.
Scott Gallacher, director at Rowley Turton, agreed landlords may not get the public sympathy but targeting retirees may get some backlash.
He added: “The fury over the scrapping of the winter fuel allowance shows that granny is off limits as far as the Great British public is concerned.”
Adjusting the balance between income tax and NI could be seen as an attempt to rebalance the tax burden towards older and wealthier demographics
Rob Mansfield, IFA at Rootes Wealth Management, felt it was time to merge income tax and national insurance, after years of “tinkering” and minimal effect.
“It will affect pensioners, who don’t pay national insurance but it should also be an easier and therefore cheaper system to administer.
“Our tax system is too complicated and so simplifying this also brings in question how relevant salary sacrifice would be without national insurance,” the adviser explained.
Thanks to the Newspage community for responding to FT Adviser’s requests for comments.
alina.khan@ft.com
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