Labour’s paper-thin defence of its tax raid has been torn to pieces

Rachel Reeves’s decisions will have a direct impact on payslips, whatever she says

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In its election manifesto, the Labour party, now the Government, made a promise: “Labour will not increase taxes on working people, which is why we will not increase National Insurance, the basic, higher, or additional rates of income tax, or VAT.
In the recent Budget, the Government increased employers’ National Insurance, which one might have imagined falls under the heading “National Insurance”.
The increase was two-fold: the employers’ allowance was reduced from £9,100 to £5,000, and the employers’ rate was raised from 13.8pc to 15pc. The paper-thin defence that the Government made in reference to its “no increase” promise was that this tax was not “on working people”.
But HM Treasury and the Office for Budget Responsibility (OBR) are both heavily staffed with clever young economists, who preside over sophisticated dynamic models of the UK economy.
They know, and they told their political masters, that increasing employers’ National Insurance would have a direct impact on the take-home pay of workers.
So even if the letter of the promise was kept, the spirit was not. And there is no doubt that the electorate will remember this sort of behaviour.
The 2024 history of National Insurance changes is complicated and somewhat confusing. In two stages, the previous Conservative administration cut employees’ NI from 12pc to 10pc (Jan 2024), and then in April, from 10pc to 8pc.
So we have had a 4pc cut in the overall National Insurance burden in 2024 before the recent 1.2pc rise. Surely this must mean less money from NI in total from 2024 policy changes?
Not so. The cost to the Exchequer of the two cuts in employees’ National Insurance was estimated at the time by the OBR to reduce government revenue by a total of £20.2bn in 2025-26.
The OBR estimated in its October 2024 review that the 1.2pc rise in the Budget would increase 2025-26 revenue by £23.7bn. So how does a 1.2pc increase in the employers’ rate more than offset a 4pc reduction in the employees’ rate?
There are two answers to this. Let’s take the first – the reduction in the allowance (called the “secondary threshold” by HMRC). This dominates the increase in revenue at about £17bn.
Some 30 or so million employees earn more than £9,000 per year, so the increased National Insurance will be about 30 million x £4,100 x 13.8pc = £17bn. The remainder is the increased marginal rate; and for employers, there is no upper earnings limit for National Insurance, whereas for employees it is £50,270.
So what do the changes in 2024 look like for employees? At the start of 2024, employees could expect to pay no income tax or National Insurance until they earned £12,570. Then up to £50,270, they paid 32pc of their marginal pay – 20pc income tax, and 12pc National Insurance.
Above £50,270, they paid 42pc – 40pc income tax and 2pc National Insurance. So the jump in marginal tax rate was 10pc when they hit the higher rate threshold.
But by the end of 2024, employees see a much larger jump in marginal tax rates when they cross the £50,270 threshold – from a marginal rate of 28pc to a marginal rate of 42pc.
So for broadly the same National Insurance revenue yield, the latest arrangements penalise the employment of the lower paid (with the lowering of the starting threshold), and penalise the higher paid in the higher-tax-rate bracket by both the threshold change and the un-capped higher employer rates.
The group which wins is the lower-to-upper-middle earnings cohort, who benefit significantly from the reduction from 12pc to 8pc in the main employee rates.
More generally, the income tax and National Insurance regimes are a mess. It makes no sense to have a regressive National Insurance rate structure allied to a very progressive income tax structure, with all pretence gone that National Insurance is simply a social insurance premium.
The latest changes, concentrated as they are on employers’ contributions, perpetuate the notion that taxing employers is somehow not going to be noticed as much as taxing employees.
It may be true that employees’ perception of their marginal tax rates are dominated by what they see in their payslips. But real take-home pay has been static now for 15 years, and whether or not employees are aware of all the “hidden” taxes that business pays, their take-home pay is directly, and adversely, affected by the ever-larger slice that is taken by Government.
Sir Keir Starmer promised the electorate that under Labour there would be a “laser-like focus on growing the economy”.
Growth in the public sector – that’s certainly visible. But real economic growth – it seems not.
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