Chancellor Rachel Reeves plans to raise up to £20bn by increasing national insurance contributions for employers in next week’s budget, which would cover around half of the £40bn funding gap she is trying to fill. will be covered.
Government sources say the prime minister plans to raise national insurance rates for employers and lower the threshold for employers to start paying tax, which will significantly squeeze corporate profits.
Conservatives will attack the rise as a “tax on jobs”, but Mr Reeves will try to make a political appeal by saying the money will go towards rebuilding the NHS.
Mr Reeves had ruled out increasing national insurance rates paid by employees, defined in Labor’s manifesto as “working people”, but made it clear that employers were not covered by the pledge.
Government officials said employers’ NI contribution rates would increase by up to 2 percentage points. This could raise around £17bn, according to the Department of Revenue’s ‘instant calculations’, although the rate increase could be slightly lower. .
Employers currently pay NI of 13.8% on workers’ earnings above £175 a week. Government officials said the salary threshold for employers to pay NI contributions would be reduced, a move first reported by the BBC.
Mr Reeves rejected the idea of imposing pension contributions on employer NICs. The idea was criticized by former Labor Secretary Sir David Blunkett, who said it would lead to bosses cutting pension contributions to staff.
The total amount raised by employer NIC increases will be reduced because Reeves will reimburse public sector employers such as the NHS for additional staffing costs.
On Saturday, Sir Keir Starmer insisted Labour’s manifesto had not misled the public, although it did not specify the full extent of the tens of billions of pounds of tax increases expected in next week’s budget.
The manifesto promised only a few niche tax increases on private schools, private equity and the oil and gas industry.
In the run-up to the July election, the party said “working people” would not face tax increases. However, the Budget is expected to include an increase in capital gains tax on stocks, an extension of the freeze on income tax thresholds and an increase in national insurance for employers.
Speaking at the Commonwealth Heads of Government meeting in Samoa, the Prime Minister said: “We have been clear in our manifesto and campaign that we will not increase taxes on working people, and we have been clear about what that means.” From an income tax, NIC and VAT perspective, we have I intend to keep the promise I made. ”
Mr Reeves has revealed a £40bn funding gap in his budget plans. This is the amount she argues needs to be raised through tax increases and spending cuts to meet the “golden rule” of public finance, which states that all day-to-day expenses should be covered by taxes. income.
Separately, Mr. Reeves would ease another fiscal rule targeting overall debt levels, allowing more borrowing to fund capital investments in areas such as green energy programs, hospitals and schools. We intend to increase this by around £20 billion.
As Mr. Reeves introduces his budget on Wednesday, he will seek to reassure businesses that large tax increases will not set the pattern for the rest of Congress. In an effort to provide “tax certainty” throughout the remainder of his term, he will develop a “corporate tax roadmap”.
Officials said this included a 25% corporate tax cap for the rest of parliament, a promise in Labor’s manifesto, and a new system of “pre-approval” for investors on the taxation of large projects. It is said that it will be done.
One official said the tax increase package would be a “one and done” operation. Mr Reeves’ allies said the chancellor wanted to “go back to the drawing board” and give businesses clarity on their plans for the future.
However, a policy adviser for a large business lobby said there was no guarantee that the government would not raise taxes in future budgets, adding: “They have not said anything about future fiscal conditions.”
The Labor government argues that tax increases are needed to stabilize public finances and increase investment in infrastructure and public services.
Next week’s roadmap is not expected to include any promises for further changes to CGT or business rates, which will leave some business groups disappointed.
Government sources said Mr Reeves’ roadmap would retain the “all-expensing” capital allowance system introduced by Rishi Sunak’s government, which sought to reduce taxes on productivity-boosting investments.
The current tax credit system for research and development will be maintained.
Mr Reeves is also expected to announce plans to create a new unit within HMRC that will provide investors with “pre-clearance”, or help them understand how future large projects will be taxed. is.
One government official said the sector would give “greater certainty to the existing tax system” but would exclude tax incentives for large investors.
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One senior business lobbyist said the sector could help get some large investments over the line, as “the UK tax system is seen as increasingly complex and unwieldy”.
The lobbyist cautioned that the move would not be a “game changer”, but said “more certainty and clarity can only be a good thing”.
Tax partners at the Big Four accountancy firms say the move will make the UK a more attractive country for investors, as HMRC has a “significant amount of litigation” with large companies, including in cases where HMRC has followed guidance from the tax authorities. said it would be.
Although the UK provides prior permission to multinational companies in limited areas such as transfer pricing, it is less secure than countries such as Australia, the Netherlands and Luxembourg.
Mr Reeves will discuss the design and scope of the new service early next year.
David Gauke, the former Conservative finance minister who oversaw the business tax roadmap in 2010 and 2016, said the exercise was particularly useful for large businesses making big long-term investment decisions.
“What really matters is not what you promise to do, but what you promise not to do,” he said. “And of course, it’s only worth it if you keep your promises.”
