This morning the Chancellor gave a pre-Budget press conference where she continued to highlight that poor state of the econonmy and hinted clearly at breaking manifesto promises and raising taxes.
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In order to help raise £30 billion the Chancellor Rachel Reeves is being urged to consdier the plans for an influential thinktank, Resolution Foundation.
Much like we reported earlier on Labour's plans to deduct national insurance on unearned income, these new plans are more of an idea on how to administer the change.
Rather than create a new category of NICs targeted at unearned income, the core idea is to cut employee National Insurance (NI) rates by 2p and raise income tax rates by 2p across bands at the same time.
This would keep most workers’ take-home pay broadly unchanged while raising additional revenue from people who don’t pay NIC (notably pensioners, landlords, and some forms of non-wage income) i.e. 'unearned' income.
The revenue brought in by the change is estimated to be around £6 billion per year
The thought behind the proosal is that with the change on income tax, it applies to a wider base than employee NI. Shifting some burden from NI to income tax broadens who contributes, reducing the bias toward taxing earned wages more heavily than other income - and because employee NI would be cut as income tax rises, typical employees’ net pay would be largely protected versus a straight income tax rise.
The impact on employees/PAYE workers is neutral as the two changes (a cut and a rise) offset each other. Pensioners and landlords will pay more, as was always the target of the government. Higher rate and top rate taxpayers will also be hit as the 2 pence rise on income tax applies to all bands - NIC is 8 percent up to the higher earnings limit but only 2 percent over that. Reeves would only cut NIC by 2 percent up the higher limit - this means higher/top rate payers will feel the 2 percent increase on income tax. Additional/top rate payers will also feel the tax charge on their zeroed personal allowance.
Scottish taxpayers have an odd situation. If Westminster cut employee NIC by 2p UK‑wide but Scotland choose not to raise its earned‑income tax rates by 2p, Scottish employees would see a net tax cut versus rUK workers.
If Scotland did mirror the 2p income tax rise on earned income, then Scottish workers would be in a similar "broadly neutral" position as rUK workers for wages/salary. Pensioners and landlords in Scotland (who don’t pay employee NIC) would only be affected if Holyrood chose to raise the Scottish earned‑income rates on pensions/rents; otherwise, they’d be unaffected by the NIC cut and only impacted by any UK‑wide changes to savings/dividend rates.
With the Budget now a few weeks away the Chancellor could also be considering the following options:
- Extend/freeze thresholds or broaden bases to counter “unfairness” in the system..
- Raise dividend tax rates and close CGT loopholes to increase revenue from capital income..
- Address unpaid small-business corporation tax.
- Environmental levies (e.g., carbon charge for long-haul flights and shipping)..
- Broader sugar/salt taxation to improve health outcomes and raise revenue..
- VAT reform at the margin (e.g., gradually lowering the VAT registration threshold) to raise additional revenue and reduce distortions among small businesses.
We have also put together in-depth Budget 2025 Predictions as we get closer to the big day.