Pensioner 1.25% National Insurance levy may be hiked to 13.25% – ‘thin end of the wedge’

This controversial increase could prove the thin end of a dangerous wedge. At some point, pensioners may be forced to pay NI at 13.25 percent on their earnings, bringing them into line with younger workers, tax experts warn.

From April, up to 30 million workers under 66 started paying Prime Minister Boris Johnson’s National Insurance health and social care levy.

This has increased the basic NI rate from 12 percent to 13.25 percent, costing somebody earning £30,000 an extra £255 a year.

In April 2023, working pensioners will start paying NI at 1.25 percent on any earnings they generate in retirement.

This has smashed a long-standing principle that pensioners no longer have to pay NI once they hit State Pension age. It is setting a dangerous precedent.

Tax experts warn this is only the beginning and the NI charge on earnings could steadily increase to 13.25 percent.

This would bring it into line with younger workers, which Rishi Sunak or a future Chancellor could justify on grounds of intergenerational fairness.

The working pensioner NI levy is “here to stay and will have to increase over time”, says Mark Routen, in-house tax specialist at Hoxton Capital Management. “This is the thin end of the wedge to start increasing tax on pensioners.”

He called this “unfair and a danger”, given how stealth taxes like this one have a habit of creeping up steadily. “The impact is often hidden at the time of implementation and people are not aware of the consequences until they bite personally.”

Under what Routen calls “fiscal creep”, the tax take increases slowly but inexorably from small beginnings.

“Stealth taxes are often announced when there is no election imminent and the tax increase is forgotten by the time people go to vote.”

The 1.25 percent pensioner NI charge fits this pattern perfectly.

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He suggested the 1.25 percent working pensioner levy lay the groundwork for a further National Insurance blitz on pensioners.

Cullinane said the health and social care levy is a tax “in all but name” and could be the launch pad for future NI raids.

“The Government will no doubt argue that this new levy is a special case but it is hard not to see this as setting a precedent making it easier to bring pensioner earnings within the full scope of National Insurance at some point in the future,” he said.

The Government may be testing the waters, and has made it easier to expand the tax later to fund Covid bailouts and balance the budgets.

This could also head off criticisms of intergenerational fairness, with young people being taxed to protect older people’s property wealth from care home fees.

Pensioners must be alert to the danger.