Scrapping National Insurance was ruled out by Nigel Lawson, memo shows

Lord Lawson considered merging National Insurance and income tax in 1986 but ended up deciding not to take the step – Alamy/Brian Harris

Nigel Lawson, the former Conservative chancellor, rejected merging income tax and National Insurance over fears pensioners would miss out, a newly surfaced memo has revealed.

Lord Lawson told Margaret Thatcher in a “secret” policy note in 1986 that the move would “create many losers, especially among the elderly”, according to the document.

The memo resurfaced via the Labour Party, which is focussing its political fire on Rishi Sunak and Jeremy Hunt’s ambition to end so-called “double taxation” as Thursday’s local elections loom.

Mr Hunt, the Chancellor, unveiled another National Insurance cut in his Budget in March and then went further, indicating that he wanted to get rid of the tax altogether.

No timeline or further details about implementation have been provided by the Tories. Some Cabinet ministers have argued it would need to be delivered over multiple parliaments.

But Labour, which is looking to reassure voters that it can be trusted with the public finances, is zooming in on what it has dubbed a £46 billion unfunded tax cut commitment.

The fact that a policy of merging the two taxes was once ruled out by Lord Lawson, the chancellor whose photograph Mr Sunak once hung in his office, is eye-catching.

Tories have long questioned whether it is fair that the income people receive is often taxed twice, first via income tax and then via National Insurance.

Income tax broadly is paid by all workers at various rates, with personal allowances letting the lowest earners avoid the tax. Pensioners, meanwhile, do not pay National Insurance contributions.

Lord Lawson considered merging the two taxes in 1986 but ended up deciding not to take the step, in part because elderly Britons could be most impacted.

Lord Lawson wrote in a note to Mrs Thatcher: “I see little practical merit in moving in this direction; it would destroy the contributory principle and create many losers, especially among the elderly.”

A more detailed explanation for why he decided not to take the move was laid out in a green paper published in the same year on possible reforms to personal taxation.

One line in Lord Lawson’s green paper read: “[A] combined charge would have to be set at about 40 per cent to remain revenue neutral. Those with low earnings would tend to gain overall because the tax allowance would reduce their liability. But this would be at the expense of taxpayers with income not currently subject to employee NICs [National Insurance Contributions].”

Another read: “Applying the new combined charge to all income would result in significant shifts in the tax burden between different sections of the community. Elderly taxpayers and other pensioners would probably be the largest group to suffer disadvantage, since they do not currently pay NICs.”

Jonathan Ashworth, Labour’s shadow paymaster general, said: “From the day Jeremy Hunt announced this unfunded £46 billion pledge, we warned that the only way the Tories could pay for it would be at the expense of Britain’s pensioners, and now we have that confirmed in the words of Nigel Lawson himself.

“Discovered after 38 years, this is the unexploded bomb which blows apart Rishi Sunak’s case for the merger of income tax and National Insurance, and if he wants to persist with that plan now, he will need to explain why he is ignoring the advice of his own hero and instead asking pensioners to pay the drive.”

The Tories have long accused Labour of misrepresenting their proposal.

Treasury and Downing Street figures have argued that the idea of ending “double taxation” is a long-term ambition rather than a specific near-term policy pledge.

They also note that National Insurance was cut both in last year’s Autumn Statement and this spring’s Budget, with national borrowing also falling within five years.

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