2p switch from National Insurance to Income Tax could raise £6 billion while protecting workers’ pay packets

The Chancellor should protect workers’ pay packets and level the playing field on how different forms of income are taxed – including a 2p cut in employee National Insurance (NI) offset by a 2p rise in Income Tax (IT) – in order to raise £6 billion in a Budget that will require significant tax increases, according to major new Resolution Foundation research published today (Tuesday).

A combination of policy-U-turns since the last Budget, higher borrowing costs and a likely downgrade to the UK’s productivity outlook mean significant fiscal consolidation will be needed for the Chancellor to meet her fiscal rules in her upcoming Budget. And with the Spending Review agreed only this summer, that consolidation will primarily need to come from tax rises.

The Foundation says that current market uncertainty means the Chancellor will need to send a decisive signal that she is prepared to take tough decisions to meet her fiscal rules. Taken together, this is likely to require tax rises of at least £20 billion a year by 2029-30.

In doing so, the Chancellor should set the UKs over £1 trillion a year tax system on an improving path and lay out a clear set of principles behind her strategy. A key priority should be protecting workers’ pay packets as much as possible, by reducing the current tax bias against employees.

The Foundation says that the previous Chancellor Jeremy Hunt rightly identified an unfair double tax on work from employee NI and IT, and the current Chancellor should continue to tackle this unfairness by switching the UK’s tax base away from the former and onto the latter. Such a switch would raise £6 billion from those who pay IT but not employee NI – including pensioners, landlords and the self-employed.

The Chancellor can go further on levelling the playing field by extending employer NI to Limited Liability Partnerships such as big law firms, and by raising taxes on dividends (where the basic rate is currently only 8.75 per cent), which together could raise another £2.5 billion.

Another key principle should be to promote fair competition across business.

This can be achieved by addressing worrying growth in unpaid small-business Corporation Tax, which has trebled from £5 billion in 2018-19 to £15 billion 2023-24. Just partially rolling back this trend could raise £2 billion. The current VAT threshold of £90,000 – double the OECD average – should also be reduced over time to stop small firms from bunching just below it. Gradually lowering it to £30,000 would raise £2 billion a year by 2029-30.

Finally, the report says the Chancellor should use the tax system to help tackle pressures on the nation’s health (and NHS) as well as support its net zero ambitions.

The report calls for the government to build on the current Soft Drinks Industry Levy by adopting a broader Sugar and Salt Reformulation Tax, as proposed in the independent National Food Strategy. With rates of £4 per kg for sugar and £8 per kg for salt, applied at the industry level, such a policy could raise around £3.5 billion by 2029-30 – enough to fund scrapping the two-child limit on welfare support. The salt element alone would add an estimated 0.6-1.8 months to UK life expectancy and would relieve pressure on the NHS by cutting the prevalence of hypertension, strokes and coronary heart disease.

Applying a carbon charge to long-haul flights and shipping, and reforming Vehicle Excise Duty to account for the road damage, noise and air pollution caused by heavier vehicles (including electric SUVs) would raise around £4 billion a year.

Adam Corlett, Principal Economist at the Resolution Foundation, said:

“Policy U-turns, higher borrowing costs and lower productivity growth mean that the Chancellor will need to act to avoid borrowing costs rising even further this autumn. Significant tax rises will be needed for the Chancellor to send a clear signal that the UK’s public finances are under control.

“Any tax rises are likely to be painful but given the fallout from the recent employer NI rise, the Chancellor should do all she can to avoid loading further pain onto workers’ pay packets.

“She can do this by switching our tax base away from employee National Insurance and onto Income Tax, which is paid by a far broader group in society. This should form part of wider efforts to level the playing field on tax, such as ensuring that lawyers and landlords face the same tax rates as their clients and tenants.

“These sensible reforms would raise revenue while doing the least possible harm to workers and the wider economy. And by acting decisively, the Chancellor can turn her full attention back onto securing stronger economic growth.”