Tory MP Ben Gummer is today introducing a 10-minute rule bill “to make provision for National Insurance to be known as Earnings Tax”. It’s a very simple renaming proposal. But branding is important, not least in politics. The Chancellor is “said to be attracted to the idea”, so if Danny Alexander and Nick Clegg were to support it, the change could make it into the Budget.
It’s well known that National Insurance is an extra income tax in all but name. As far back as 1994, Lib Dem policy was “to abolish national insurance contributions and create an integrated tax on income” and in 2006 the party called for a merger “as the contributory principle becomes obsolete”. Some – but not all – flavours of National Insurance Contributions (NICs) do count towards pension eligibility, but even this is based only on the number of years of work. The existence of a separate National Insurance Fund, which pools some ‘contributions’, is little more than an accounting trick.
A liberal tax system would be transparent and comprehensible as well as equitable. While a pragmatic centre-left argument might be that we need a deceptive tax system to fund invaluable public spending, we must consider that the real outcome of favouring opaque taxation has been a shift away from even-handed taxes – and away from groups with the loudest political voice – towards a largely regressive tax that hits only labour income.
Renaming NICs is clearly only a first step. But it would help remove evident political barriers to reform. For example, Liberal Democrats want to cut NICs for low earners and simplify the tax system, but the party doesn’t think it can sell that message sufficiently well. It’s a Catch 22 argument: National Insurance is overly complicated and poorly understood therefore it can’t easily be changed. So parties are pushed into choosing policies that are simpler to explain but are less progressive and usually end up making reform even harder. Renaming would help improve public understanding and policy making, and would also make it easier to trumpet the coalition’s various cuts to employers’ NICs.
There are many options for new names, but I think “earnings tax” is indeed the most accurate for employees and the self-employed. Employer National Insurance should be renamed as a distinct “salary tax” as its long-run effect is to reduce headline salaries. These names would certainly be more accessible than technical terms like “Class 1 secondary National Insurance Contributions”.
With these names entering political discourse, it would become easier to propose cuts to taxes on low salaries/earnings. And it would beg the question of why wages – alone among income sources – are subject to a salary tax, an earnings tax and an income tax!
For added substance, this change could be one of a welcome package of National Insurance changes in the Budget to make the tax system fairer and simpler. CentreForum proposes:
- Scrapping Class 2 National Insurance, an unnecessary poll tax for the self-employed
- Aligning the other self-employment threshold with the income tax allowance
- Increasing the self-employment NICs rate to fund those tax cuts and slightly reduce the tax break for self-employment
- Aligning the employer and employee thresholds – set to differ by only £1 a week – and ideally raising them both further
- Moving NICs to an annual and per-person (rather than per-job) basis
- Looking into extending the new employer NICs exemption for under 21s to those aged 21-24, and whether a threshold of over £40,000 for those young workers was too generous
- Reviving the plan to send out personal tax statements – another Ben Gummer initiative and once Lib Dem policy. These should include your income tax and ‘earnings tax’, as well as your employer’s ‘salary tax’ (plus an impartial breakdown of public spending and your place in the income distribution).
10-minute rule bills are largely meant to draw attention to an idea. In the case of renaming National Insurance, it’s a good one and should be backed by Liberal Democrats in government, together with other steps to help fix our tax system.
* Adam Corlett is an economic analyst and Lib Dem member
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31 Comments
and presumably employers’ contributions as employment tax.
It’s not an ‘earnings tax’ it’s a contribution paid towards selected benefits, it doesn’t go into the general treasury pot for general spending, unlike actual income taxes, or earnings taxes as they can also be called.
It seems to me, and this may be paranoia, that by changing the language you make it easier to bill future cuts to national insurance as ‘tax cuts’ for low paid workers. When what that actually means is a smaller benefits pot, and typically, reduced benefits payments for low paid workers, or those who find themselves unemployed.
@g, are you under the impression that each worker has their own “benefits pot”? Because that’s categorically not the case. There’s no reason at all why cutting NICs for low paid workers would mean reduced benefit payments for them. I don’t think there is now a single benefit that is affected by the amount of employee/employer NICs one has actually paid.
It’s not even the case that there is a shared benefits pot in any meaningful sense. Most benefits do not come out of the National Insurance Fund and a proportion of NICs – as determined by the government as needed – doesn’t even go into the fund. If it wanted to, the government could redirect income tax to some “health and education” pot, funding those services through that pot and changing the size and precise use of the pot to fit the figures. Would that mean that income tax was no longer a tax but a “contribution paid towards selected services”? No.
It’s precisely because of these misconceptions and deceptions that we need a name change and broader reform.
I agree with the thrust of this article, hope the parliamentary party will listen.
I have never been able to understand why someone who retires with a private pension before state retirement age is excused from national Insurance contributions for the rest of their life, while someone of the same age who has to go out and earn a living until state retirement age has to continue paying this tax.
@Adam – thanks for this, a very sensible approach. Anything that moves the politics towards accepting NI as income tax so that we can incorporate it into income tax (ideally, including employer’s NICs, too) and have a more transparent system would be most welcome. If only it was more broadly recognised that (employers’ NI apart) the effective tax rates are 0%/12%/32%/42%/47%, we’d also have a more sensible discussion on making the system more progressive, too.
Alternatively, we could refocus NI and so make it meaningful again. However, that would require much stronger ring fencing of monies than we’ve seen todate…
Not sure that this is a snesible idea, but I do agree with Adam when he says – ” …. But branding is important, not least in politics….”. One of the reasons why the vote of the Liberal Democrats has collapsed since 2008 is that the political brand we spent fifty years establishing and got support for has been wrecked.
National insurance when first introduced reflected the existing friendly society insurance schemes whereby better paid workers were able to provide themselves with some cover in case of illness or for their old age. I agree that it has become another Treasury tax in all but name. So perhaps rather than changing the brand or the surface appearance we might be better doing someone about the substance.
There could of course be a lot of fun in re-branding various elements of government activity.
The Civil List could be re-branded welfare benefits for the idle rich. We could then “sanction” the recipients if instead of seeking gainful employment they went on holiday to Saudi Arabia to wave swords with arms dealers and tyrants.
The renaming is pointless. Merge National Insurance with Income Tax and get rid of the ridiculous unnecessary complication this introduces into the tax system.
Agree with the article in principle; would prefer a combined employee NI and Income Tax at 0% up to minimum wage, 35% up to 100k, and 52.5% above that.
I agree with the broad thrust of the article and particularly with Toby Fenwick’s comments.
Our overall aim should be a combined income tax with a high basic allowance and simple progressive bands above it.
The debate over social security has become toxic, with resentment fuelled by right-wing tabloids and Tory politicians. It is therefore important that social security payments (both in and out) are seen as an “insurance” and not just another “tax”. Misfortune can happen to anyone, and is certainly not a “lifestyle choice”. We need to remind people of this fact and be more assertive about promoting progressive values. Rebranding NI as a tax would not help in this case.
Anything that makes it easier to combine National Insurance and Income Tax is a good idea.
@ Adam Corlett “I don’t think there is now a single benefit that is affected by the amount of employee/employer NICs one has actually paid.”
I think you are mistaken. Old Age Pensions today and after the recent reforms takes account of a person’s NI contribution. There are contribution related Job Seekers benefit and some disability benefits (there has been an outcry at restricting them to one year only).
The removal of all contribution related benefits would make them either a flat rate (hopefully for pensions) and make all other benefits means tested. It might even do something about entitlement – “I have paid in all my life” to become that in a moral society we all pay towards helping those in need no matter what they have paid into the system.
agree with the article, thank you.
but give me a combined income tax that does the following:
0% that tracks a full-time minimum wage equivalent (~£12,500)
20% that goes from full-time min wage equiv to 3x this amount (~£37,500)
40% that goes from 3x full-time min wage equiv 9x this amount (~£112,500)
50% above this amount
no tail-offs, no exemptions, simple.
and, important point of principle; the state does not consider it has a right to more than 50% of anyones money, no matter how much they earn.
While we are about it, could we not call the 60% tax rate on income between £100000 and £120000 “Withdrawal of personal allowance”
@jedibeeftrix I agree with the tax rates. It would be even better if there was a voluntary ratio between the highest and lowest wage rates as advocated by the Wagemark Foundation of Toronto and Peter F Drucker or a statutory maximum ratios as I have advocated.
Really it is time to stop this notion that income tax and NIC’s are seperate and combine the two into one tax. Quite a simple way to do it. Add tax rates and NIC rates together, and then start the new combined tax at current personal allowance points. Oh and don’t bother giving high earners their current tax break, levy it on all earnings. That should pretty well pay for the higher starting threshold for paying the new combined tax. This would help to genuinely take the low paid out of tax.
Don’t rename it amalgamate into a system with allowance set at National living Wage ande make the base rate 30% don’t remove tax allowances at all and raise the upper rate to 60% £150,000 radical I know but it simplifies the system and doesn’t ruin the rich in the process and is progressive.
Merging employees NIC with income tax makes sense but the employers’ NIC is a separate animal and should be retained as a separate tax, even if you call it something else.
Employers’ NI tax (the salary tax) could be a way of taxing very high salaries more effectively without incurring the arguments against and shortcomings of the 50% top rate income tax.
For example, skew Employers’ National Insurance Contributions away from the low paid end towards the very highest end. The effect could be tax revenue neutral.
►It would encourage overall employment, and
►benefit the vast majority of small and medium companies (SMEs), especially those that employ large numbers of people.
►tackle the disparity between the very highest paid employees and average pay.
How? A new pay band should be introduced payable on a total remuneration incl bonuses etc (not balance over ..), of £500,000 per year (say). To keep it simple it should be implemented without allowances to minimise scope for tax avoidance.
A rate of say 20% might be an appropriate introductory rate. The current rate of Employers’ NI contributions is 13.8% for earnings over £7700pa approx
►This upper band by itself would raise approx £1bn in revenue.
►It is an easy and cheap tax to collect
►It is a difficult tax to avoid.
►The mechanics of the tax are well established
For a tax (and overall company taxation) neutral approach this revenue could be used to reduce employers’ NI Contributions for low paid employees.
►The high end band would not penalise the individuals concerned because it is paid by the employer.
►However it does increase the tax paid by companies with very high paid employees.
►This is a ‘cliff edge’ tax – deliberately. The cliff edge would focus the attention of any employer considering paying an employee more than the (£500K) high pay threshold.
For an Employee earning £499K, the employer contribution is approx £68K ie as paid by the employer currently.
With this tax change, for an Employee earning £500K the employers’ contribution would be £100K
For an Employee earning £1m the employer contribution would be £200K (currently approx £136K
►For companies who do not employ anyone earning over £500K the change would be entirely beneficial.
Politically
►No individual would pay any more tax. The 50p income tax arguments do not apply.
►It cannot be presented as ‘anti business’. The vast majority of businesses would benefit.
►It would encourage employment in the lower paid sector.
►It could act as a brake on increases in remuneration for the very highest paid.
►It does not force social change, but it would encourage it.
►It could complement LD policy of raising the income tax threshold for the low paid.
@Kevin Maher
‘ I have never been able to understand why someone who retires with a private pension before state retirement age is excused from national Insurance contributions for the rest of their life, while someone of the same age who has to go out and earn a living until state retirement age has to continue paying this tax.’
Having been in precisely that position, with a part-time job, I did pay voluntary National Insurance until I was 65 because I was advised correctly that it was a good deal in order to add to my state pension contribution record. (Because in some weeks/months my earning passed the threshold, I did pay Nat Ins in those years, but not necessarily enough to count towards the pension. ) But I did think it was slightly ridiculous that, although I continued working to 67, I then was exempted form Nat. Ins. contributions. (I deferred taking my state pension to then and got quite an enhancement to it.).
But I wholly agree that it is ridiculous that elderly people with substantial pension or investment income, like me, may not have to pay any Nat Ins.
Actually, and without bothering to read the comments on this thread, I am apt to say that our people have sold their own people down river.
To my father’s and my grandfather’s generation national insurance was to be their buffer between dignity and destitution.
The cosmetic change proposed is very attractive, but my feeling about this is that the devil is in the detail.
National Insurance was and looks like a hypothecated tax. The Treasury doesn’t like them, which may be a good reason for retaining the most important ones! Before we leap into completely integrating it into income tax we need to examine Nat Ins’ good and bad features and ensure that we don’t lose the good ones.
National Insurance contributions are paid on weekly earnings, which insures that people who have highly variable earnings are not overcharged in the short term. Similar arrangements on income tax tend to be more based on the year, which means they take longer to sort out.
There is simple link between employee and employer contributions. There is a lot of detail to be sorted out in how much this is important and how it should be maintained. How does the present system or its successor affect employers’ hiring decisions?
Because it was introduced as a safety net for sickness, unemployment and old age for those on modest earnings, there is an upper limit on earnings that attract contributions. This seems unreasonable, or at least should be revised.
Ian, no doubt you have a point, but could you couch in it in a form that the rest of us are able to access. Thank you, Ian.
Shirley Campbell “Ian, no doubt you have a point, but could you couch in it in a form that the rest of us are able to access. Thank you, Ian.”
Just read Ian’s comments and understood them perfectly. Am perplexed by your comment Shirley???
No doubt, Ian is able to wheel and deal within the existent system , I could not care less. I care about our people, my people.
Will, Jedi, Chris
While you are suggesting a 50% tax rate, consider that the treasury research suggest that the peak of the Laffer curve is about 47% so why not use that figure (assuming adjusting as estimates improve)?
Ian
“National Insurance was and looks like a hypothecated tax. The Treasury doesn’t like them, which may be a good reason for retaining the most important ones!”
But it isn’t hypothecated, so it is dishonest. Retaining it because it looks, but isn’t, something the treasury doesn’t like is ridiculous. That is saying we should keep something because it looks like, but isn’t, fraud.
“National Insurance contributions are paid on weekly earnings, which insures that people who have highly variable earnings are not overcharged in the short term”
Quite the opposite. The weekly calculation disadvantages those who struggle to get consistent work, it creates a loop hole for someone acting as a limited company to avoid it.
Basing it in an annual figure would be fairer.
“Because it was introduced as a safety net for sickness, unemployment and old age for those on modest earnings, there is an upper limit on earnings that attract contributions. This seems unreasonable, or at least should be revised.”
Welcome to the new millennium, what it was 100 years ago is irrelevant we need something that works for today.
I never expected so many conservative (in the nostalgic sense) arguments for something on a liberal discussion. Some people seem to have given up their logical faculties presumably because it was introduced by a Liberal.
Lets get back to what voters care about, does it work?
Clearly not.
I am not sure how you classify paying NI on weekly earning as a good thing given it means that people who take temporary work end up paying NI when if those earnings were averaged over a year they might not have to pay as they might be below the NI threshold.
NI is NOT a hypothecated tax, it basically all goes into the same pot as general taxation and pensions, benefits etc today are paid out from taxes & NI coming in today not some big pot of NI contributions the pension or benefit recipient has paid into over their lifetime.
I can’t think of a single good thing about NI but I can think of many benefits to simplifying the tax system by amalgamating it with income tax and having clear fair incoem taxation levels
Great Idea – Let’s build up Liberal Democracy by renaming a tax. 40% in the polls here we come!
Maybe, just maybe, doing something real people actually want us to do, might work better.
@ roger – “I agree with the tax rates. It would be even better if there was a voluntary ratio between the highest and lowest wage rates”
not my problem and not my concern. I say this as a lower rate taxpayer.
@ psi – “While you are suggesting a 50% tax rate, consider that the treasury research suggest that the peak of the Laffer curve is about 47%”
I am all for efficient taxes, particularly efficient and non-punitive taxes.
I presume the treasury figures talk of income tax as it currently is, separate from NICs, whereas I ask for a 50% ceiling on a combined income and insurance tax…