Nick Clegg has this week called for a further increase in the basic tax threshold of £500, which would cost around £1bn and put an extra £10 a week into peoples pockets. It is a good call but it’s not the best call.
National Insurance is in theory is a tax that is hypothecated to pay for our pensions, our unemployment benefits and other aspects of social security, but in reality all of our social benefits are subsidised out of general taxation. What it does however do economically is constrain the poorest paid in our society in a trap that makes living off benefits more viable than accepting low paid work. If you earn up to £5,668 you pay nothing, from there to £41,444 you pay up to 12% (with lots of complications including contracting out of part of the state pension), and after £41,444 you pay just 2%.
The long term aim for Liberal Democrats should be to remove the upper earnings limit, and thereby reduced substantially the level of contribution paid by low to middle earners. In the meantime, however, if Mr Clegg has £1bn to invest in reducing the tax burden on the poorest in our society he should look to raising the LEL.
If he were to raise the UEL to twice national average wage and then use the £1bn and the surplus from the increase in the UEL to raise the LEL he could raise the LEL by more than £ 3,000. NI is only charged at 12% therefore costs less to raise than income tax which means you can make a bigger increase, and by increasing the UEL simultaneously you can stop those on the higher income bracket for NI from benefiting from the increase in the LEL thereby reducing the overall cost of the increase even further.
This would put at least £360 a year, or £30 a month back into the pockets of the poorest paid in our society, and because it is a direct cut in the tax on jobs at the lower end it would mean that low paid work is more affordable for people at the benefits threshold. This would be a real workers bonus, and enable many more Britons to afford to take up the low paid jobs currently being created in our economy
* Ian Donaldson is a member of ECE and a representative of the Party in England to FCEC.
Follow @libdemvoice.org on Bluesky
Like us on Facebook
Subscribe to our feed
Sign-up for our daily email digest
Labour no longer stand up for the sick and vulnerable
Urban ReLeaf - event invitation #dundeewestend
Alan Bennett on Dudley Moore and jazz
Colin Bloodworth
Helen Dudden
Mark Frankel
Mick Taylor
Peter Davies
19 Comments
Playing with the UEL will do funny things to marginal rates. Agree with the LEL though – raising that should be prioritised until it matches the income tax threshold.
Didn’t George Osborne announce ambitions to merge income tax with NI a few years back? What became of that?
So you are saying we should remove the UEL, which would mean those in the 40% tax bracket would go from paying a combined income tax and NI rate of 42% to 52% and those in the 45% bracket would go from paying 47% to 57%?
Even if you just increase the UEL to double national average earnings (approximately £53,000), this would still create a marginal tax rate of 52% for those earning between £41,452 and £53,000, I don’t agree with this, but you should state clearly what increasing or abolishing the UEL would mean for the taxpayer. We have it for a reason.
Also, raising the LEL will do nothing for workers because they don’t pay NI until they reach the Primary Threshold, which is set at £7,748 per week whilst the LEL is set at £5668. All the LEL is for is National Insurance Credits, which are vital to qualify for the state pension, so what we should do instead is raise the Primary Threshold and possibly even lower the LEL.
The Primary Threshold is set at £7,748 per year sorry, not per week. This is the amount where NI becomes payable and is the bracket we need to increase. This will not affect state pension entitlement because you accrue national insurance credits on any earnings above the LEL, which is set at £5,668 per year.
Good points by Eddie – it’s the PT we wanted to raise, not the LEL.
“This would be a real workers bonus”
It might surprise Iain that higher earners are also ‘workers’ and hence would not regard what is being proposed as a ‘bonus’… so lets have less class/social discrimination…
I suggest for reasons of transparency and to align state mandated deductions with other deductions from employee’s pay that we re-establish the link between NI and Pensions and certain defined benefits and draw the costs of these wholly from the NI contribution. thereby undoing decades of deliberate obfuscation around the purposes of NI and Income Tax for reasons of political expediency (ie. so that politicians can claim they haven’t raised Income Tax when in fact they have played around with NI etc.
Yes there are issues at the low end, but I expect that to make work more appealing and affordable to low earners we need to reform the benefits system so that marginal rates of tax are lower and applied less aggressively for these people (a look at the way tax credits are removed now compared to how they were removed when first introduced gives a good example of the perverseness of the benefits system in effectively ‘fining’ people for improving their income).
I believe John Smith when shadow Chancellor floated the idea of abolishing the NI UEL, and we know where that got Labour in 1992. As Eddie so rightly points out, the effect at the margin would be jump from a combined rate of 32% to 52%, whereas now it is from 32% to 42%, which I think is a reasonable progression. Combining tax and NI may have theoretical attractions but should not be seen as major way of increasing the tax take. Incidentally, another major obstacle is the fact that pensions are not subject to NI – or is it being suggested that the Party should go into the next election promising to dramatically increase the tax paid by pensioners?
All this math about LEL and UEL is beyond me. As a discharged bankrupt and a part time working OAP who has less than £4 in my bank account at the end of each week. all this talk about increasing the personal allowance is just fiddling about with the economy.
What is needed is to have a fair distribution of income ensured at source. Then a complicated, bureaucratic redistributive tax system would not be necessary. It would just create job losses in the civil service,
merging income tax and NI is valuable as an exercise in simplifying taxation, but I am happy that all income brackets pay roughly the same proportion of their income (roughly 30%).
likewise, tinker with tax bands, but keep the overall burden in line with public tolerance (roughly 40% of GDP).
Pedants’ Corner – Maths, not math (we are not Americans, yet, I hope).
It is still obvious to me if you are on National minimum wage and working 30 hours or less the idea fails to make any difference to your well being where as if you raise the threshold of National Insurance everyone, but especially those on low incomes benefit .
Eddie Salmon suggests that removing the UEL would move top earners from 42% to 52%. Firstly the top rate is 47%, Labour’s amendment to the budget that would have set the top rate of income tax at 40% did not get passed, and so it remains at 45%. More importantly though, the removal of the top cap, and keeping the amount of NI rasied at the same level as it is now, would bring the percentage of salary paid in NI down from 12% considerably. Indeed a maximum combined rate of 50% would could be achieved.
Eddie goes on to suggest that it is the PT we should increase not the LEL, I accept that and actually it means that the £10,000 parity in PT and Basic Tax Threshold may be achievable in one go without much adjustment to the UEL, if that’s what the £1 billion were spent on.
Roland, I accept that high earners are also workers, however £1bn spent cutting their taxes would not have that significant an impact in their overall spending capacity. Indeed the only thing that will significantly improve their lot is the substantial improvement in economic growth which we are now seeing combined with a commitment from politicians not to spend the increased income that we get as a result of that. As the enconomy grows and therefore the deficit shrinks we will be in a position then to redistribute that new wealth in the form of tax cuts across the board.
Graham Evans, what I propose here is not how I would like to see things done by a future Liberal Democrat Government, it is how I would like to see this particular £1 bn spent. If you want to see my full proposal and rationale for a future Government then look at the previous posting I did here that sets that out quite clearly.
Robert Wootton, the Lib Dems in Government have secured a lot for pensioners that the Tories on their own would not have done, particularly the new Pension of £140 a week for all new pensioners which I would hope a future Government will extend to all pensioners. However, bad management of our national pension schemes by previous generations is not something that £1 bn can ever alleviate, it can however help to alleviate to some small degree worker poverty, and this debate is about how best to do that.
Jedibeeftrix, we will agree to disagree on everyone paying the same level of income tax. That particular UKIP proposal is one that quite frankly would result in massive cuts to social care and services.
Tim13, Mathematics if you want to be really pedantic.
Chris Randall, I totally agree, but then if you are earning less than the NI threshold in any given week you are not going to be paying NI or Income tax so no amount of tax breaks will make an iota of difference, and as politics is about making a difference I would rather spend my time pondering how to do that instead.
Iain, we both understand the marginal tax and NI rates perfectly well, so there is no difference here, just a breakdown in communication.
I like the sound of your idea of removing the UEL if it coincides with a reduction in NIC rates, but your article didn’t mention reducing the NIC rates anywhere, which is why I mentioned the 10 percentage point tax increases.
Best wishes
Like Eddie, my comments were principally based on the idea of retaining the existing tax and NI rates, so I think Iain needs to come up with some precise figures for the revised rates if we are to determine whether his proposal is really a runner, i.e. merely designed to redistribute £1 billion of revenue. Or is it really a way of doing a Gordon Brown – redistribution of much more than £1 billion by stealth? Also, how does Iain propose to avoid the accusation that Lib Dems would increase the overall tax burden on pensioners?
“Jedibeeftrix, we will agree to disagree on everyone paying the same level of income tax. That particular UKIP proposal is one that quite frankly would result in massive cuts to social care and services.”
Iain, you mistake me. I refer to the current situation where treasury calculations show that all deciles of the income scale pay roughly 30% of that income to exchequer, when taking into consideration the use and receipt of public services and working benefits such as workng tax credits and family tax credits
all paying roughly 30% is fine, and I am not so hung up on fairness that I wouldn’t tolerate a little more lumpyness if it greatly simplified the tax code.
Yes so would I and the harmonisation of levels for payment of both types of income taxation would be really beneficial, progressive and supportive of the low paid.
Just submitted a variation of this idea to the manifesto group. “Increase the national insurance threshold from £7,748 to £10,000, increasing take-home pay by £270 per year”. To be paid for by either getting rid of the LEL (and therefore free state pension entitlement) or creating a new NI rate around the £150,000 mark of around 3 or 4% (presently 2%), which would also bring NI thresholds up to speed with tax thresholds.
Increasing the NI threshold wouldn’t help people over state pension age though, because they don’t pay national insurance anyway. However, this age group has largely not been benefitting from the income tax allowance increases because most people over 65 get a higher allowance anyway. Their age related allowance has only really been going up with inflation and was in fact frozen last year. The age related allowance begins to be taken away after £100,000.
As we can see, complicating the tax system in order to protect or to target certain groups also affects marketing, policy making and the the economy in general.
Sorry, the age related allowance begins to reduce after £26,100 per year. So pensioners earning over this amount don’t get the higher pensioners personal allowance of £10,500. Rustyness from me there.