Steven Cameron, Pensions Director at Aegon: “Chancellor Jeremy Hunt's decision to cut National Insurance (NI) contributions will be welcomed by both employees and the self-employed. But doing this, rather than cut income tax rates, carries significant implications for both individuals and the state pension system.
“While the NI cuts directly benefits employees and the self-employed, unlike a cut in income tax rates it won’t benefit those over state pension age (currently 66), who are exempt from NI contributions.
“But NI cuts have the benefit of applying automatically across all of the UK, ensuring equal benefits for all regions such as Scotland. This is in contrast to cutting income tax, which is subject to devolved powers, so for example, would not have applied in Scotland unless the Scottish Government had followed suit.
“Furthermore, National Insurance contributions provide funding for essential benefits, including the state pension. Although this reduction in contributions will be welcomed by many, it could further strain the sustainability of the state pension due to an aging population and the triple lock mechanism leading to substantial pension increases. Without additional funding from general taxation, the affordability of the state pension may become increasingly challenging.
"Finally, a cut in income tax rates would have led to lower pensions tax relief, whereas cutting NI rates does not reduce the generosity of pensions tax relief.”
Dean Butler, Managing Director for Retail Direct at Standard Life said: “Reports that the headline rate of NI will be cut by 2% will no doubt be welcomed by workers who will hold on to more of their earnings as a result. It is workers who will benefit from this as those over state pension age do not pay NI. Unlike a change to income taxes, an NI cut would apply to the whole of the UK, as income tax rates are devolved in Scotland. The other difference from an income tax change is that it will not affect the level of tax relief that applies to people’s pension contributions.”
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