Chancellor Jeremy Hunt could either cut income tax, reduce the employee National Insurance rate or unfreeze the personal allowance in the Budget next week (March 6), according to Steven Cameron, pensions director at Aegon.
Cameron highlighted three options Hunt could take when it comes to tax cuts and what the implications of each would be.
He said: “Lowering income tax rates would be a stand-out headline-grabber, but Hunt could repeat what he did in his Autumn Statement and instead cut the employee NI rate.
“A third alternative is to unfreeze the personal allowance – the point above which you start paying income tax and NI – which could actually do more to boost the finances of those on lower and medium incomes.”
Cutting income tax vs employee NI rate
Cameron pointed out while a 1 per cent cut in income tax would have a similar impact on individuals as a 1 per cent cut in employee NI, there were things Hunt needed to consider.
A cut to the rate of income tax would not be good for future pension savings, according to Cameron.
“Your pension contributions are boosted by tax relief at your highest rate of income tax, so a cut to income tax rates means less pension tax relief,” he added.
On the other hand Cameron warned cutting NI would make the state pension funding even less “sustainable”.
He said: “For those over state pension age (currently 66), a cut in NI rates would offer no benefit, as people above this age are exempt from paying any NI.
“Last but not least, the funds raised from NI are used to cover the cost of the state pension. With an ageing population and the triple lock formula producing another huge 8.5 per cent increase this April, cutting NI further would make the state pension funding even less sustainable.”
Unfreeze the personal allowance
An alternative Hunt may consider next week is increasing the personal allowance, currently frozen at £12,570, and causing more people to pay tax on a greater proportion of their salaries.
Cameron said if the chancellor were to increase the personal allowance for income tax and NI by 10 per cent it would mean millions of people would not pay income tax or NI on an extra £1,257 a year.
This would save the basic rate tax payer £251 in income tax and £126 in NI and for those earning less than £50,270 this would be more than the boost to take-home pay that would be generated by a one per cent cut to either tax.
Cameron added: “Increasing the personal allowance would also reduce the risk of the state pension (increasing to £11,502 from April) tipping over the personal allowance and subjecting millions of state pensioners to income tax on some of their state pension, even if they had no other income. This would be extremely hard for any government to justify.”
This comes after the Institute for Fiscal Studies warned Hunt should not make any tax cuts in the upcoming Budget until he has set out how the government would pay for them, earlier this week (February 27).
