Secret Thatcher-era memo undermines Sunak’s plan to scrap national insurance

When Rishi Sunak held the post of chancellor he kept a portrait of Nigel Lawson in his office. Photograph: Simon Walker/HM Treasury

A secret, unpublished memo from Margaret Thatcher’s tax-cutting chancellor Nigel Lawson warned against merging national insurance and income tax because it would “create many losers” including pensioners.

The advice in the memo will be a blow to Rishi Sunak, who has said it is his ambition to scrap the tax on workers. He has called Lawson a “transformational chancellor and an inspiration to me and many others”, and said one of the first things he did as chancellor in Boris Johnson’s government was to hang a portrait of Lawson above his desk.

Labour said the memo showed the prime minister was “ignoring the advice of his own hero” in the 1986 note unearthed from archives by the party. The public release of the memo comes as Labour plans a new campaign to appeal to voters of pension age – the only demographic where the Conservatives still lead on voting intention.

The type-written memo, marked secret, was sent to Thatcher two months before Lawson’s third budget and was enclosed alongside a green paper set to be published that day. The document was found in the archives of the Margaret Thatcher Foundation.

In the brief, Lawson says he has considered “the scope for integrating income tax and national insurance contributions”, but concludes: “I see little practical merit in moving in this direction; it would destroy the contributory principle and create many losers, especially among the elderly.”

In the separate green paper, Lawson says low earners would benefit from the change but it would come at the expense of those who are not currently liable for NICs.

“Applying the new combined charge to all income would result in significant shifts in the tax burden between different sections of the community,” it says. “Elderly taxpayers and other pensioners would probably be the largest group to suffer disadvantage.” He says the shift “would be hard to justify on either economic or social grounds”.

The paper goes on: “If benefits were paid to everyone, regardless of their contribution, there would be substantial extra costs which would have to be borne by the general body of taxpayers … Tax-paying pensioners would in a sense be asked to pay twice: after a lifetime of paying NICs, they would then have to pay contributions towards benefits which they thought they had earned as of right on the basis of their earlier contributions.”

In the March budget, Jeremy Hunt announced his “long-term ambition” to abolish NICs, saying he was looking at the option to “merge income tax and national insurance”.

The Institute for Fiscal Studies has said the pledge will cost the public finances more than £40bn and Labour cited House of Commons library research that suggested replacing lost NICs revenue would cost pensioners an extra £944 a year on their income above the current £12,570 personal allowance.

Jonathan Ashworth, the shadow paymaster general, called the Lawson memo “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 price”.

A Labour poster campaign will launch on Tuesday warning that the Tories are a “threat to the state pension” because of the planned changes for NICs.

The latest Opinium poll for the Observer revealed that the over-65s were the only group in which the Tories lead Labour, but by a narrow six points. Labour insiders have said the final week of the local election campaign will be focused on older voters and rising concerns about the repercussions of abolishing national insurance.