The government has dismissed the idea of extending national insurance contributions (NIC) to working pensioners, saying this would pose "a real challenge".
In a hearing yesterday (11 September) in front of the select committee on Intergenerational Fairness at the House of Lords, Lindsey Whyte, director of personal tax and welfare at HM Treasury, said national insurance was linked to the contributing principle, which means individuals cannot contribute towards it beyond the state pension age.
She said: "There is a real challenge to apply NIC to people who are in fact in drawdown in the state pension."
Research published in May by the Resolution Foundation Intergenerational Commission called for pensioners who are still working to continue to make national insurance contributions, in order to fund a £2.3bn NHS deficit.
According to research from Royal London, more than a quarter of taxpaying pensioners are still in paid work – 1.5 million have employment income and 0.5 million have income from self-employment.
Ms Whyte said the fact that working pensioners don’t pay NICs was a financial incentive for companies to hire these workers, as they don’t have to make such contributions. It also acted as a "strong incentive" to encourage more people to stay in work longer, she said.
At the hearing, Baroness Blackstone said the current situation was "perceived by many younger people as inequitable - that once you take the state pension even if you’re earning quite a high salary you are not paying NICs."
She asked Ms Whyte for evidence that changing this would act as a disincentive for people continuing to work.
Ms Whyte replied: "There are a huge range of factors which will affect individuals' decisions whether or not to stay in work for longer, for some people financial incentives will be important.
"I don’t have specific impact assessment of that to share. I can say is that the revenue impact [for the Treasury] of 1 per cent increase in people above the state pension age staying at work is worth around £600m."
Martin Bamford, chartered financial planner and managing director of Informed Choice, said the proposal to extend NICs into retirement "makes real sense".
He said: "By taxing higher earning pensioners, the Treasury can fairly fund existing pressures on society caused by our ageing population, including a larger budget for the NHS and funding adult social care.
"It’s going to be politically challenging to introduce, as older people tend to vote more than younger people do, but we need this type of equality among taxpayers."