Rumoured NICs rise would make pensions more attractive

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National insurance contributions could rise by 1 percentage point to address the long-running funding issue for social care, newspaper reports suggest, despite a Conservative party manifesto commitment not to increase taxes.

The government has dodged the social care funding question ever since Theresa May's 'death tax' almost derailed her election campaign in 2017 despite a U-turn. At a press conference on Monday, the prime minister did not say whether taxes and NICs would increase or not.

News reports now suggest the government is considering raising NICs by one point, to fund long-term care. NICs are paid by employees on earnings from £9,568 up, unlike income tax, which is only paid from £12,570. It would thus capture a larger number of employees while sparing pensioners, as those of state pension age are currently exempt from paying them.

Voters will make their own minds up

Tom Selby, a senior analyst at investment platform AJ Bell, said the pandemic may be forcing politicians to grasp the social care nettle.

“It is not yet clear what prime minister Boris Johnson’s long-term care solution will look like, although previous administrations have considered a cap on costs set somewhere between £50,000 and £80,000," said Selby.

Selby pointed out that increasing NICs would make salary sacrifice pension contributions more attractive as they are relieved from national insurance and tax.

While hiking national insurance is an easy way of raising funds for social care, it would expose the government to accusations of intergenerational unfairness and breaking a manifesto commitment, he added.

“The government may try to badge this as a ‘social care levy’ separate to national insurance contributions. This would, on the face of it at least, keep its pledge not to raise NI rates intact – although whether or not voters would see it that way remains to be seen," he speculated.

NICs for pensioners?

Sarah Coles, personal finance analyst at investment platform Hargreaves Lansdown, said a 1 point rise in NICs would generate an estimated £10bn for the exchequer, which would be used to help clear the enormous NHS backlog and fund a cap on social care.

The government could decide to address the intergenerational issue by deciding that because older people stand to benefit from the change, they may have to help pay for it, she said: "It could bring in a class of contributions for older people. Alternatively, it could make the specific choice to protect this group from the impact of the change."

Salary sacrifice pensions would become more attractive, she agreed, both for employees and employers.

But "with the chancellor and the prime minister self-isolating and MPs set to pack up for the summer this week, it’s likely that we’ll have to wait for the autumn for any major announcements. At that point, we’ll be heading towards the Budget, and there’s the chance the tax floodgates will open", Coles said.