Over six million workers will face a surprise cut in their take-home pay from next month after a technical tax change announced by the Chancellor.
George Osborne has changed the way national insurance contributions are calculated as moves to consolidate the state pension into a so-called “single tier”.
Affected employees face an extra 1.4 per cent charge on their earnings through NI, while employers will be hit with a 3.4 per cent charge.
The changes are expected to raise £5.5 billion a year for the Treasury.
Workers could previously opt out of the second state pension and pay a lower rate of national insurance – but this rule is now being abolished.
The opt-out could only be used by people with access to an employer pension scheme, which they “contracted out” their contributions to.
The changes will hit around five million public sector workers and 1.5 million private sector workers.
Steve Webb, former Liberal Democrat pensions minister and now director of policy at Royal London, told The Times newspaper: “I think the chancellor had hoped that no one would notice this rather large tax increase smuggled out in advance as it was some years ago.”
George Osborne 2016 budget at a glance
George Osborne 2016 budget at a glance
1/8 Debt forecasts up, growth forecasts down
The OBR’s new forecasts have downgraded growth in all of the next five years to 2020. The watchdog says the economy will only grow by 2 per cent in 2016, as opposed to the anticipated 2.4 per cent. Borrowing and productivity growth are also down – with forecast borrowing in 2018-198 £16 billion higher
2/8 New tax on sugary drinks
The Chancellor announced a new tax on sugary soft drinks, which is projected to raise £520 million. At least some of the money will be spent on doubling funding for school sport, the Chancellor says. Labour leader Jeremy Corbyn welcomed the levy
3/8 Tax cut for higher earners paying the 40p rate
The Chancellor has raised the threshold for paying the higher rate of income tax to £45,000. The higher rate is paid by roughly the richest 15 per cent, currently people earning over £42,386
4/8 Increase in tax-free income tax threshold
The tax-free allowance increase to £11,500 in April 2017 – up from £10,600 now. The Chancellor previously raised the allowance from £6,475 in coalition with the Liberal Democrats. The Conservative manifesto pledges to put the allowance up to £12,500 by the end of the Parliament
5/8 New devolution for counties and powers for London and Manchester
The West of England, the East of England and Greater Lincolnshire will all get elected mayor-led combined authorities with new powers. The Chancellor says they are backed by £1 billion new funding. Greater Manchester will get new powers of criminal justice while London will keep its business rates – giving whoever is elected Mayor a lot more spending power
6/8 Fuel duty frozen for sixth year running
The Chancellor had planned to end the fuel duty freeze he had put in place for the whole previous parliament. In the event, he has announced a freeze for another year
7/8 All schools to become academies
As reported yesterday the Chancellor unveiled legislation to turn all schools into academies. He said all schools would either be academies or on their way to being academies by 2020, and that funding had been set aside to fund the change
8/8 Lifetime ISA
The Chancellor announced a new savings account to encourage under-40s to save for retirement – for every £4 saved, the Government will top this up by £1 up to the value of £4,000 a year. Tax-free ISAs will also be increased from £15,000 to £20,000
Paul Johnson, director of the Institute for Fiscal Studies think tank, said: “Members of final salary occupational pension schemes and their employers will now be paying the same NI contributions as the rest of us.
“Since they will be building up just the same state pension rights this can only be right.”Reuse content