Rachel Reeves is gearing up for another billion-pound raid on National Insurance Contributions (NICs) as the Chancellor finds ways to plug a huge fiscal black hole in November’s Budget.
Reeves is understood to be drawing up plans to extend NICs taxes to include limited liability partnerships or LLPs, to whom the tax does not currently apply, in a move expected to raise as much as £2bn for the exchequer.
The plans, which were first reported by The Times, mean major tax hikes for around 200,000 workers who use LLP corporate structures. Lawyers, GPs and fund managers, who often belong to LLPs, are likely to be hardest-hit by the move because the structure currently treats them as self-employed, disapplying employer NIC obligations.
The potential changes follow a major NICs raid at last year’s Budget, which saw the rates of employer NICs increased on top of lowering the tax-free threshold, a move which added billions of costs for major employers in industries such as retail and hospitality.
Income tax threshold freeze
Economists have said Reeves would likely stop short of raising the rates of income tax or employee NICs, moves which would violate Labour’s manifesto promises.
“We regard a freeze in income tax allowances and NICs thresholds a near certainty,” said Michael Saunders, senior advisor at Oxford Economics.
“[But] in our view, it’s highly unlikely that the Chancellor will lift the main rates of income tax, VAT, employees’ NICs or corporation tax, given Labour’s manifesto commitments.
“Another rise in employers’ NICs is also unlikely, because of the adverse effects of employment and inflation of last year’s hike. Rather, the emphasis will be on broadening the tax base [and] cutting tax allowances.”
Other measures to broaden the tax base could include extending NICs to cover landlords, a policy change that could raise as much as £2bn, and introducing a new rate of NICs on private companies’ contributions to employees’ pension schemes, currently exempt from NICs, also raising £2bn.
Reeves is also expected to extend the freeze on income tax allowances and NICs thresholds to the 2029/30 tax year, dragging millions more employees into paying higher rates of tax and raising an extra £10bn.
The Times also reports that the Chancellor is considering a ‘mansion tax’ on the sale of the most expensive residential properties.
Higher earners to face the most pain
There are now more than half a million Londoners earning six-figure salaries, an increase of 9 per cent compared to last year and representing around one in ten taxpayers, in signs the concerns of those caught in the so-called tax trap are likely to become a growing electoral force for the government to reckon with.
Reeves has repeatedly insisted that “those with the broadest shoulders” should pay their “fair share of tax”.
High earners between £100,000 and £125,140 are already taxed more heavily because the tax-free personal allowance of £12,570 is reduced for every pound extra earned above the threshold.
Hargreaves Lansdown calculations already show that the effective tax rate is at around 60 per cent for these earners while childcare support from the government is also lost for earners above £100,000, adding costs on Henrys not incurred by lower earners.
Analysts at the investment platform have warned that an extension to a freeze on income tax thresholds, which has been widely floated by leading economics think tanks and media reports, could make more Brits fall into the tax trap depending on wage growth.
Analysis has also shown that the number of people already in the tax trap could be dragged into the top tax band.
The number of people paying at the additional rate of tax of 45 per cent over £125,140 has already more than doubled since 2022.