Rachel Reeves is set to raise up to £20bn by increasing employers’ national insurance contributions in next week’s Budget, in a move that will cover about half of the £40bn funding gap she is trying to fill.
The chancellor will raise the employers’ rate of national insurance and cut the threshold at which employers start paying the tax, government officials said, in a big raid on company profits.
The Conservatives will attack the rise as “a tax on jobs” but Reeves will try to give it political appeal by saying the funds would go towards rebuilding the NHS.
Reeves had ruled out raising national insurance rates paid by employees — defined as “working people” in the Labour manifesto — but had made it clear that employers were not covered by the pledge.
Government officials said the rate of employers’ NI contributions would increase by up to 2 percentage points — a change that could raise about £17bn according to the HM Revenue & Customs’ “ready reckoner” — although the rate rise could be slightly less than that.
Employers currently pay NI of 13.8 per cent on a worker’s earnings above £175 a week. Government insiders said the salary threshold at which employers pay NI contributions would be cut, a move first reported by the BBC.
Reeves has rejected the idea of levying employer NICs on pension contributions. That idea was criticised by former Labour minister Lord David Blunkett, who said it would lead to bosses cutting pension contributions to staff.
The total amount raised by the employer NIC increase will be reduced because Reeves will reimburse public sector employers — such as the NHS — for their extra staff costs.
On Saturday Sir Keir Starmer insisted that he did not mislead the public in Labour’s manifesto, which did not set out the full extent of the tens of billions of pounds of tax rises expected in next week’s Budget.
The manifesto only promised a handful of niche tax rises on private schools, private equity and the oil and gas industry.
The party said in the run-up to the July election that “working people” would not face tax rises. But the Budget is expected to include a rise in capital gains tax on shares, an extension of a freeze in income tax thresholds as well as the jump in employers’ national insurance.
Speaking at the Commonwealth heads of government meeting in Samoa, the prime minister said: “We were really clear in the manifesto and in the campaign that we wouldn’t be increasing taxes on working people and spelt out what we meant by that in terms of income tax, in terms of NICs and in terms of VAT, and we intend to keep the promises that we made in our manifesto.”
Reeves has identified a £40bn funding gap in her Budget plans — the amount she says she needs to raise from tax rises or spending cuts to meet her fiscal “golden rule”, which says all day-to-day spending should be covered by tax revenues.
Separately, Reeves intends to increase borrowing by about £20bn to fund capital investment in areas such as green energy schemes, hospitals and schools by loosening a different fiscal rule covering overall debt levels.
Alongside the Budget on Wednesday Reeves will seek to reassure business that big tax rises will not set the pattern for the rest of the parliament. In an effort to provide “tax certainty” for the rest of the government’s term, she will set out a “corporate tax road map”.
Officials say this will include a cap on corporation tax at 25 per cent for the rest of the parliament — a Labour manifesto commitment — and a new system of “advance clearance” for investors on tax rules for big projects.
One official said the package of tax increases would be a “one and done” operation. An ally of Reeves said the chancellor wanted to “wipe the slate clean” and give business the clarity to plan for the future.
But a policy adviser at a large business lobby group said they had been given no assurance the government would not increase taxes in future Budgets: “They have not said anything about future fiscal events.”
The Labour government says it needs to increase taxes to stabilise the public finances and step up investment in infrastructure and public services.
Next week’s road map is not expected to contain any commitments on further changes to CGT or business rates, which will disappoint some business groups.
Government insiders said Reeves’ road map would retain the “full expensing” capital allowance regime introduced by Rishi Sunak’s Conservative administration, which seeks to provide tax breaks for investments that improve productivity.
The current system of tax credits for research and development will be maintained.
Reeves will also announce plans for a new unit within HMRC to provide investors with “advance clearance” — or help in understanding how they would be taxed on future big projects.
One government official said the unit would give “greater certainty over existing tax rules” but ruled out preferential tax treatment for large investors.
A senior business lobbyist said the unit could help push some big investments over the line, since “the UK tax system is seen as increasingly complicated and difficult to navigate”.
While cautioning that the move was not a “game-changer”, the lobbyist said: “Adding certainty and clarity can only be a good thing.”
A tax partner at a Big Four accounting firm said the move would make the UK more attractive to investors, since HMRC had become “quite litigious” with big companies including in some cases where they had followed the tax authority’s guidance.
While the UK gives multinationals advance clearance in limited areas such as transfer pricing, it gives less reassurance than countries such as Australia, the Netherlands and Luxembourg.
Reeves is set to hold consultations on the design and scope of the new service early next year.
David Gauke, a former Tory Treasury minister who oversaw business tax road maps in 2010 and 2016, said the exercise was particularly useful for large corporates making big long-term investment decisions.
“What’s really important is not what you promise to do, but what you promise not to do,” he said. “And of course it’s only worthwhile if you stick to your promises.”
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