Tax exemptions for working pensioners cost the Treasury £1.1 billion last year — and this generosity should stop, the chancellor is being told.

Rachel Reeves should end the tax “anomaly”, which sees employees stop paying national insurance after they reach state-pension age, even if they continue to work. Prominent think tanks have warned that the system benefits “older, often wealthier” workers.

It comes after Reeves U-turned on plans to increase income tax by 2p and lower national insurance by the same amount, which would have amounted to a tax rise for pensioners.

National insurance is levied at 8 per cent on earnings between £12,570 and £50,270 and at 2 per cent on income over that threshold. You do not pay national insurance contributions on earnings below £12,570.

When a worker reaches state-pension age they remain liable for income tax but no longer have to pay national insurance. State pension age is 66 at the moment but will rise to 67 between April 2026 and April 2028.

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The exemption exists because historically most people stopped working once they could claim the state pension. National insurance contributions were also designed to pay for the state pension, which older people would be receiving so would no longer need to contribute to.

However, the Treasury is grappling with an increase in the number of working pensioners. About 1.12 million people over 66 are still in work, up from 457,000 in 2000, according to the Office for National Statistics.

Separate figures from the Department for Work & Pensions show that working pensioners take home an average of £425 a week (£22,100 a year), while 6 per cent have an income of £1,500 or more a week — more than £78,000 a year.

Adam Corlett from the Resolution Foundation think tank, which proposed a 2p national insurance rise alongside a cut to income tax. said: “There is no good reason why a worker should enjoy a significant tax break simply for reaching their 66th birthday.

“This is one of a number of expensive anomalies in the system where income is taxed differently depending on someone’s age, or employment status. While there may be a case for measures focused on supporting people to stay in work, the status quo is more of a historical accident than a targeted plan. A simpler system would be fairer and ease the pressure for tax rises elsewhere.”

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Conor Nakkan, a senior researcher at Intergenerational Foundation, said it was “increasingly hard to justify”. He added, “Many older people remain in paid work well into their late sixties and seventies. For most of them the exemption functions as an automatic pay rise that their younger colleagues do not receive.

“At a time when the government is desperately trying to raise additional revenue, it makes little sense to maintain an age-based exemption that benefits older, often wealthier workers, while younger workers shoulder the full burden of national insurance.”

But would a tax hit on pensioners raise any cash?

The former pensions minister Steve Webb said that the exemption means that the government misses out on £1.1 billion in national insurance each year — but that ending it wouldn’t necessarily raise that amount. This is because the idea of having to pay national insurance could convince many pension-age workers to retire.

“If national insurance was to be charged on these earnings some of these people would stop work altogether, thereby costing the government through lower income-tax receipts,” Webb said.

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Dennis Reed from the campaign group Silver Voices said that the exemption encourages those who can work to remain in the workforce. “It’s a recognition that someone has paid contributions for maybe the past 50 years,” he said.

“It also recognises rising costs that are more expensive in retirement, such as social care. If there was some kind of deal — say, the government provided for social care in exchange for national insurance contributions — there is a discussion to be had. But simply slashing the exemption is not appropriate.”