No stealth tax hike from pension reform, says Treasury

The Treasury has vowed not use an expected £6bn in additional national insurance contributions (NICs) from the new flat-rate £144 a week pension as a stealth tax hike.

An aide to the chancellor told the FT that the windfall wouldn't be used "for net revenue raising", but would be used to reduce other taxes or help fund public spending after the new pension kicks in in 2017.

The new state pension plan is set to deliver an early boost to the exchequer, due to the fact that while the reforms are revenue neutral, with both gainers and losers evenly split, the NIC take will be significantly higher.

This is because once the state second pension is removed, the rationale for "contracted out" NI rebates disappears, meaning that staff and employers who have "contracted-out" will therefore pay higher NICs.

And as the pension metamorphoses into a single universal rate, no earnings-related elements are left to waive, leading to those who "opted out" having to shell out more.

Ending the employer rebate will force employers to pay 3.4 percentage points higher NICs on employees earning up to £40,040.

However, private sector employers can still take advantage of a scheme to reduce the generosity of their defined benefit schemes, in order to offset their increased employment costs.

As over 5m public sector workers have defined-benefit pensions, a big slice of the Treasury windfall will be derived from the largest employers - local authorities and the department for health.

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