There is growing speculation that the Chancellor may soon raise the basic rate of Income Tax from 20% to 22%. At the same time, it is thought that a corresponding 2% cut in employee National Insurance contributions could be introduced. Together, these changes would shift how the overall tax burden is shared, particularly between working individuals, pensioners, and landlords.
Although nothing has been formally announced, the idea has gained momentum in recent weeks. The reasoning is simple enough: by increasing Income Tax and cutting National Insurance, the Government could raise more revenue without appearing to penalise those in work. It would make the tax system appear more balanced, but in reality, it would have very different effects depending on the type of income you receive.
For employees
If you are in employment, the two changes may largely cancel each other out. Employees pay both Income Tax and National Insurance on their earnings. At present, basic rate taxpayers pay 20% Income Tax and 8% employee National Insurance on most of their pay.
If Income Tax rises to 22% and National Insurance falls to 6%, then the increase in one would broadly offset the decrease in the other. For example, for every £100 of taxable pay, you would pay £2 more in tax but £2 less in National Insurance. In theory, this means little change to take-home pay.
However, the detail matters. National Insurance applies only to earned income up to an upper earnings limit (currently £50,270). Those earning above that level may not benefit from the full reduction. Similarly, if higher rate tax bands remain unchanged, some employees could see a small increase in their overall bill.
It would also be worth checking whether you are part of a salary sacrifice pension arrangement, as the value of those schemes depends partly on National Insurance savings. A lower NIC rate may slightly reduce the benefit of such arrangements.
For pensioners and landlords
The position is very different for those who do not pay National Insurance. Pensioners, landlords, and individuals living on investment income currently pay Income Tax but no NIC. A 2% rise in the basic rate would therefore increase their total tax liability, with no offsetting reduction.
A pensioner receiving £30,000 of taxable pension income could pay around £600 more tax each year if the basic rate rises to 22%. Similarly, a landlord earning £25,000 of rental profit would face an additional £500 of tax. For anyone, whose income comes largely from pensions, rent, or investments, this would amount to a direct increase in the effective tax rate.
This shift would represent a deliberate rebalancing of taxation towards unearned income. The Government could claim that “working people” are protected, but those living from pensions or savings would shoulder a greater share of the burden.
For the self-employed
The self-employed occupy a middle ground. They pay both Income Tax and Class 4 National Insurance, but the NIC rates and thresholds differ from those for employees. Whether they gain or lose would depend on whether the Budget also cuts self-employed NIC. If not, they could experience an overall increase in their combined tax and NIC bill.
What you can do now
Until the Budget is announced, nothing is certain, but it makes sense to plan ahead. Review your sources of income and estimate how much is subject to National Insurance and how much is not. If most of your income is from pensions, rent, or investments, you should prepare for a possible rise in your tax bill from next April.
Employees may not notice much difference, but anyone outside the NIC system could. A simple review now can help you plan, budget, or consider timing income or pension withdrawals before rates change.
We will provide a full update once the Chancellor confirms the details in the Autumn Budget.
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