Excitement — or perhaps anticipation is the better word — is building over what tax changes the government will unveil in the Budget on 26 November. The conversation has long since moved from if to what.
Think tanks have set out a wide range of ideas, from the Resolution Foundation and Demos to the Institute for Fiscal Studies (IFS) and, most recently, CenTax.
Most advisers will know Labour’s now familiar manifesto pledge that it “will not increase taxes on working people – which is why we will not increase national insurance, the basic, higher or additional rates of tax or VAT”.
In addition, the Government’s Corporate Tax Roadmap promises not to raise corporation tax during this Parliament (other than for the Bank Levy and Bank Corporation Tax Surcharge). Together, those taxes make up nearly three-quarters of the UK’s total tax take.
Beyond the perennial debate on pensions, the spotlight is now on income tax and national insurance
Attention has since turned to wealth taxes and, more realistically, changes to the taxation of residential property — whether through a new property tax or higher council tax. Either could be combined with a cut or removal of stamp duty land tax to rebalance revenues.
Beyond the perennial debate on pensions, the spotlight is now on income tax and national insurance. “What?” you might ask, given the government’s red lines. Yet necessity may soon test those boundaries, depending on how broadly “working people” is defined.
Recent discussion has centred on innovative national insurance reforms that could raise additional revenue while nominally staying true to the “no harm to working people” promise — ideally without denting economic growth.
Among the more creative ideas is one from the Resolution Foundation, proposing a 2% cut in employee NICs offset by a 2% rise in income tax across the board. In theory, workers would see no overall change as the NIC reduction cancels out the income tax rise.
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The snag? Self-employed people and partners would miss out on the NIC saving. Are they not “working people” too?
Under this model, the 2p income tax rise — without any NIC offset — would apply to all non-employment income, including pensions, rent and investment income, but excluding dividends. Dividend tax rates would likely rise to match.
The underlying assumption seems to be that only income from employment qualifies for protection — not pensions or investment returns from years of work.
Other think-tank proposals on NICs include:
- Extending the freeze on NIC thresholds by two more years to 2029/30 (Resolution, Demos, IFS).
- Introducing a new NIC charge on rental income above a “normal” 4% return, at 20% up to £50,270 and 8% thereafter (Demos).
- Applying 13.4% NIC to partnership income, including LLPs (Demos; Resolution for LLPs only).
- Imposing NIC on pension income (IFS, cautiously).
- Charging NIC on employer pension contributions (IFS).
- Reducing employer NIC relief on salary sacrifice (IFS, Resolution).
That’s a lot of NIC innovation — full marks, at least, for imagination.
Currently, partners in partnerships and LLPs are treated as self-employed for both income tax and NIC purposes. They pay Class 4 NIC on their profits but, as they are not employees, no employer NIC at the current 15% rate applies. They also receive fewer social security benefits and no employer pension contributions.
CenTax has proposed a 15% NIC charge on profits at the partnership level before distribution, designed to align the overall burden between partners and employees. It estimates this could equate to an effective 6.9% tax rate on partners’ profits and raise around £2bn from “those with the broadest shoulders”.
Tax Policy Associates’ Dan Neidle illustrates the impact: “A solicitor whose gross income is £316,000 currently takes home about £180,000. If his income was subject to employer national insurance, he’d take home £158,000.
“That’s a very big difference. His effective tax rate has gone from 43% to 50%, and his marginal rate from 47% to 54%. We see more dramatic effects at the largest law firms, where many partners earn well into seven figures.”
A simpler alternative might be to increase Class 4 NIC for individual partners above a high-income threshold
Proponents argue that such a charge would “even up” the NIC treatment between partnerships and companies. Some suggest limiting it to LLPs, though excluding traditional partnerships could encourage avoidance through re-structuring.
Politically, including NHS GP partnerships would be fraught, given existing pressures on primary care. Policymakers could exclude GPs, set a profit threshold to spare smaller practices, or limit the charge to partnerships with, say, 30 or more partners.
A simpler alternative might be to increase Class 4 NIC for individual partners above a high-income threshold, possibly with progressive rates. That would be less disruptive and easier for HMRC to administer while still raising additional revenue.
Any NIC increase will change the risk-reward balance for partnerships and could make a corporate structure more attractive – and, perhaps for some of the more mobile affected individuals, a move to a less fiscally harsh environment and some remote working.
Tony Wickenden is MD of Technical Connection, an SJP Group Company
