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Why working people will be counting the cost of Reeves’s Budget for years to come

Labour’s ruthless tax assaults will make it harder to save, hire and retire

As the Budget draws closer, the definition of “working people” is getting narrower. Sir Keir Starmer has made it clear that people who own shares and rental properties will be fair game for a tax raid, regardless of whether they work or not, but has insisted that those who go “out and earn their living” will be protected. 
Yet even this is misleading. Rachel Reeves is expected to use this week’s Budget to increase employers’ National Insurance contributions, which are paid on wages. The measure is set to be the largest revenue-raising change in the Budget, netting £20bn. 
The Chancellor has also considered raiding the retirement savings of workers by introducing National Insurance on the contributions employers make to pension pots.
Business leaders and politicians warn that both measures will hit working people by making it harder to get a job and dragging on wage rises.
Companies paying the minimum wage and making the legal minimum contributions to pensions under auto-enrolment cannot offset the cost of a higher National Insurance bill either through lower wages or by cutting back pension contributions. Hiring fewer people – or even sacking staff – may be the only alternative. People in low-wage jobs such as hospitality and retail are therefore likely to feel the sting.
When former chancellor Jeremy Hunt cut the headline rates of National Insurance, officials said it would add the equivalent of almost 200,000 full-time staff to the workforce. By contrast, raising employers’ National Insurance would be expected to lead to fewer jobs.
Tina McKenzie at the Federation of Small Businesses (FSB), says she wants tax-cutting measures to encourage employment, not a national insurance raid.
“It’s crucial that the Chancellor avoids making it more expensive for small businesses to employ people,” she says. “There’s no doubt that hiking jobs taxes on small employers would lead to hiring freezes – or worse – and would make pay rises less affordable, if money which could go to workers is instead syphoned off into the Treasury.”
Those in higher paying jobs would feel the pinch too. Employers are likely to recoup the cost of an increase in their National Insurance bill either through smaller pay rises or raising their prices. Both would hit working people.
Experts and politicians from across the political spectrum have warned that a National Insurance raid on pensions would leave private sector workers poorer in retirement, widening an already large savings gap with the public sector and leaving Labour open to the charge that their idea of “working people” effectively means just state employees.
Baroness Altmann, a former pensions minister, says: “It is so jaw-dropping and so outrageous I cannot quite believe it. You are making private sector workers pay more money for the pensions of people who have already got better arrangements than them, and possibly have worse arrangements for themselves as a result. It is just astonishing.”
Alex Hall-Chen, at the Institute of Directors, says such a tax increase does not fit with the Government’s attempt to argue that “working people” will escape pain in the Budget. She says: “The likely result of National Insurance on employers’ pension contributions will be to reduce the generosity of employers’ pensions benefits and salary sacrifice schemes. The knock-on impact will therefore be borne by workers through a reduction in their pensions savings.” 
Sir Iain Duncan Smith, the former work and pensions secretary who oversaw the introduction of auto enrolment in the coalition government, says such a tax raid would be “bloody appalling” with ramifications for decades to come. “This will be an absolute, unmitigated Labour disaster which will damage lives in future and will mean the cost and burden to the state will grow in the future, not be diminished, because there will be fewer savings,” he argues.
“This is both mad, because it means people in the private sector won’t save, which means they will become a burden in later life; and it is deeply, robustly unfair that people in the public sector should be treated better than those in the private sector, who pay for the public sector’s pensions.”
National Insurance tax relief on employer contributions to pension schemes totalled £15.4bn in the most recent tax year. The Chancellor is expected to give public sector employers a rebate to cover the extra cost on their payrolls, meaning any change will likely raise around £10bn net for the Exchequer. 
Reports on Saturday suggested Reeves had decided against a tax raid on pensions but was still targeting employers’ national insurance.
The Chancellor is set to avoid a pensions raid because of the ramifications. While the tax would be levied on companies, ultimately workers would pay the price, argues Sir Steve Webb, the former Liberal Democrat pensions minister. “When you tax a business, three people can pay: the workers, the customers and the owners. There is nobody else,” he says. “Future pay increases may be lower than they would have been, and [employers] may try to reduce the cost by making pensions less generous, which then has an impact on the employee 20 years hence.
“When you finally draw it, you end up poorer in retirement than you would have been. We are not saving enough as a nation, so this makes the problem worse. [An NI raid] particularly penalises the best employers who do the most generous pensions.”
Guy Opperman, formerly a minister in the Department for Work and Pensions, predicts businesses with generous pension schemes would slash them back and focus on pension funds with the lowest fees rather than the best performance.
It is not only Conservatives and Lib Dems who are worried. Lord Blunkett, who served as work and pensions secretary in Tony Blair’s Labour government, has also urged the Chancellor not to launch a National Insurance raid on pensions.
Such a change would add an enormous cost on to businesses; if the tax is applied at the headline rate, it would push up the cost of pension contributions by 13.8pc.
Applying the rate only to private sector workers would widen an already large savings gap with the public sector. For employees with a workplace pension, the average value of a pension was £65,400 in the public sector, compared with just £10,300 in the private sector.
This is because public sector workers are often on final salary schemes, which guarantee a set payout in retirement, while private employees more typically save into defined contribution schemes, where the final payment in retirement is uncertain.
“It is not unusual to have contributions of 20pc of salary in the public sector, that ballpark, which is more than the minimum for a worker in the private sector which is much less than that,” says David Sturrock, at the Institute for Fiscal Studies.
Tax policy is already favourable to public sector workers. The previous government abolished the lifetime allowance on tax-free pension savings because of complaints it was hitting doctors and other highly-paid public sector workers. The current Government is thought to have decided against limiting relief on higher-rate taxpayers’ pension contributions because it would hit head teachers and top civil servants.
But private sector workers get little such consideration. A Treasury spokesman says: “We do not comment on speculation around tax changes outside of fiscal events.”
The Government is certainly aware of the risks. Insiders are concerned about the growing pressure on businesses, particularly those that employ young or low-skilled workers.
Even if pensions are spared next Wednesday, a change to employers’ National Insurance means working people will be counting the cost of this Budget for years to come.

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