Rachel Reeves has been urged to take 2p off the rate of employee national insurance and add it to income tax in her autumn budget, to raise billions of pounds while protecting workers’ pay packets.
Putting forward plans to raise up to £30bn, the influential Resolution Foundation thinktank called on the chancellor to “level the playing field” on how different forms of income are taxed.
The organisation, which has close connections with Labour ministers spearheading the budget preparations, urged Reeves to consider a sweeping package of measures to reshape the tax system.
In a report that will be closely scrutinised in the Treasury, it said an additional £6bn a year could be raised through a policy to cut employee national insurance by 2p, with a corresponding increase for all income tax bands.
This is because income tax applies to a wider group of taxpayers than employee national insurance – including pensioners, landlords and self-employed people. Income tax is devolved in Scotland and Wales but the thinktank said it would expect them to follow the approach taken in England and Northern Ireland.
While the Resolution Foundation said the 2p “switch” plan would help to iron out “unfairness” in the tax system by spreading the tax take across a wider group in society, the policy could put Reeves in danger of breaking Labour’s manifesto promise not to raise income tax.
However, such a policy would leave employee tax rates unchanged, protecting the pay packets of working-age employees. It would also build on national insurance cuts made by the former Conservative chancellor Jeremy Hunt, who argued the system represented an “unfair double tax on work”. The previous government’s 4p cut in national insurance, costing the exchequer £20bn a year, was not matched by an increase in income tax.
The intervention comes as Reeves faces intense scrutiny over Labour’s economic management amid widespread speculation about tax increases in her autumn budget, which is due on 26 November.
Economists warn that Labour’s high-stakes welfare U-turns, elevated borrowing costs and an anticipated productivity downgrade from the Office for Budget Responsibility could leave her with a shortfall against her self-imposed fiscal rules of up to £40bn.
Reeves has so far been tight-lipped over the potential for tax increases, preferring to focus on the government’s mission to drive up economic growth to help swell the Treasury coffers.
Earlier this month she said decisions in her budget would aim to ensure the government had enough money to fund public services, while also seeking to safeguard workers and business investment.
Reeves’s budget planning is being overseen by Torsten Bell, the former Resolution Foundation chief executive who is now the pensions minister. Dan Tomlinson, a former researcher at the thinktank, was promoted in this month’s reshuffle to become a junior Treasury minister, with responsibility over tax measures at the budget.
Calling on the chancellor to use the budget as an opportunity to reshape the UK’s £1tn-a-year tax system, the Resolution Foundation said Reeves could set out changes to reduce a bias against employees while raising more from wealthier individuals.
Putting forward a £30bn package of proposals, options alongside the “switch” in income tax included extending the scope of employer national insurance to cover limited liability partnerships, such as big law firms, and taking action to tackle unpaid small-business corporation tax.
Other measures included the adoption of a broader sugar and salt tax, a carbon charge for long-haul flights and shipping, and changing vehicle excise duty to account for the road damage, noise and air pollution caused by heavier vehicles.
Adam Corlett, a principal economist at the Resolution Foundation, said: “These sensible reforms would raise revenue while doing the least possible harm to workers and the wider economy. And by acting decisively, the chancellor can turn her full attention back on to securing stronger economic growth.”
A Treasury spokesperson said: “The chancellor makes tax policy decisions at fiscal events. We do not comment on speculation around future changes to tax policy.”
