Budget will hit middle-income earners to raise cash for NHS

Sweeping changes to national insurance will be announced by Gordon Brown in his Budget on 17 April, with cuts for the low-paid matched by higher payments for the better-off.

The changes could raise between £3bn and £4bn a year, which is expected to be pumped into the National Health Service. But the move would be controversial and carry high political risks, since middle-income earners on about £30,000 a year would be hit as well as the rich.

The options being considered by Mr Brown include increasing the rate of employees' national insurance (NI) contributions from 10 to 11 per cent, which would raise £3.3bn a year. Mr Brown could also bring in another £900m by raising the upper earnings limit on which NI payments are made from £29,900 a year to £33,935, the level at which people pay the top rate of tax – 40 per cent.

If these changes were implemented, they would cost someone on a salary of £40,000 about £650 a year in higher NI payments, while a person earning £20,000 would pay about £150 more.

But to sugar the pill the Chancellor is expected to give back some of the extra revenue by cutting NI contributions at the bottom end of the income scale. He could achieve this by increasing the level at which workers start to pay national insurance, currently £4,524 a year.

Mr Brown may also seek to help people just above the £30,000 income bracket, who would otherwise lose a bigger share of their earnings than someone on £100,000.

The changes may be delayed until next year to give the Government time to make the case for higher NI payments.

The Chancellor will make a pledge to put the NHS on a secure long-term footing the centrepiece of his Budget. He hopes that channelling money from the NI shake-up into health will make the changes more acceptable to voters.

But Mr Brown will have to convince the public that giving the NHS more money will make a real difference. In the current year, £1.9bn of the extra £5bn going to the NHS will be soaked up by higher pay, while £1bn will be spent on drugs and £550m on extra staff. A senior Treasury source admitted: "It is not enough to put in adequate funding. People need to feel that the money is delivering high-quality public services. We have not won that argument yet."

The proposed NI reforms would also trigger a political row, with the Tories accusing Labour of breaking promises it made during last year's general election campaign. The Tories claimed then that if Mr Blair won a second term, he would revive plans in Labour's 1992 election manifesto to abolish the ceiling on NI contributions, saying this would in effect mean a 50 per cent top rate of tax.

But Mr Blair and Mr Brown denied the Tory charge. Although Mr Blair will be nervous about alienating middle income earners who switched to Labour in 1997, Mr Brown believes that Labour has "moved on" from 1992 by showing that it can be trusted to run a sound economy. The Chancellor will argue that he has not broken any promises made last year. The Labour manifesto pledged no rise in income tax rates but, as one Brown ally told The Independent yesterday: "We made no commitments on national insurance in the manifesto, and that's what matters."

Meanwhile, the Chancellor made clear yesterday that he was preparing "a Budget for enterprise as well as for public services" as he announced new tax breaks for small business in deprived areas.

Mr Brown, addressing a Transport and General Workers' Union conference in Leeds, said he would grant further stamp-duty exemptions on commercial properties in the inner cities. He also gave notice of moves to offer a new community investment tax relief for those companies that set up in run-down areas and a flat-rate VAT scheme to help firms with a turnover of less than £100,000.

The Chancellor blamed the weak euro for manufacturing problems in the UK. "I want people in disadvantaged communities to see that the enterprise culture, too often restricted to the élite, is open to them – not least in high unemployment communities where employment for too long has passed them by," he said.

The British Chambers of Commerce welcomed the package as a "starter", but its president, Anthony Goldstone, said small firms were "hungry for the Budget main course".

"The only sustainable way to regenerate some of our most rundown areas is to encourage businesses to set up there and the Chancellor's tax breaks will certainly help," he said. "However, other factors such as business crime and the availability of insurance also dissuade firms from setting up in some areas. Therefore, a more wide-ranging policy will be required."

Michael Howard, the shadow Chancellor, said that under Labour tax on business had risen by £5bn a year while the cost of red tape had also gone up by £5bn a year.