There has been much talk recently about how we are going to raise money to fund public services, and National Insurance Contributions (NIC) is usually the option the Treasury takes. This is predominantly because the public see NICs as something distinct from general taxation.
However, continually raising NICs hurts the income of working people, depresses wages and is generationally unfair.
NICs is only levied on those aged 65 and under, this explains to an extent why it is still seen as a contribution rather than a tax. However, with life expectancies rising and insufficient pension savings, people are working much longer. Raising NICs does not impact those that use public services the most, over 65s, which probably explains why the Tories are considering it.
That is what happens on the employee side, now for the employers. There are numerous studies which show that Employer NICs get passed onto the employee anyway through wage reductions. If we raise Employer NICs, we are just going to squeeze wages further in a time of rising inflation and a squeeze on living standards.
Instead, what we should do is look at changing NICs.
When we entered Government in 2010, we pledged to raise the personal allowance. This helped take millions of people out of Income Tax and put more money back into the pockets of hard-working people.
We should look at doing something similar with NICs. Currently, the NICs threshold is around £8,400 per year. We should raise this, as we did with Income Tax, and we should look to merge NICs and Income Tax. This would help to simplify the tax system that so many people find difficult to navigate as it is.
As well as this, in the meantime, we can expand the remit of NICs. Firstly, it should be levied on those that are over 65. Not all of NICs is targeted, so there is no reason why over 65s shouldn’t pay it.
Secondly, we could extend NICs to private pension income, property income and dividends. Wealth in Britain has grown massively over the past decades, which is fantastic for those that have managed to accumulate this wealth.
However, plenty of people haven’t, and it would be unfair to expect those to pay more NICs for their salaries, while other forms of income are ignored. These measures would help to raise between £4 to £5 billion per year for the Treasury.
Now is not the time to raise NICs, it is time to start reforming them. Taxes should not be used as a political football when the governing party needs to raise some revenue, which is why I support rolling NICs into Income Tax. In the meantime, though, NICs should be reformed to make it fairer and more equitable.
* Collingwood is a Liberal Democrat member in London who is known to the editorial team.
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19 Comments
Wouldn’t most of your reforms be done automatically by rolling NICs into income tax?
@ Tom Purvis “Firstly, it should be levied on those that are over 65. Not all of NICs is targeted, so there is no reason why over 65s shouldn’t pay it.” “Secondly, we could extend NICs to private pension income”.
That’s not reforming NIC – it’s putting it up for the over 65’s and the retired. Delete reform – insert extend.
It is yet another guaranteed way of losing what’s left of the 8% (?) of the electorate still supporting the Lib Dems….. or is it yoof revenge on that portion of the electorate perceived to have supported Brexit ? Having reduced the top rate of tax for the wealthy when in government, this will be a double whammy by Lib Dems if they pursue this path.
Arguably one of the first things to do and something not mentioned in the article would be to raise National Insurance Contributions above £46,350 – it is unclear why they should pay 2% when the rest of us pay 12%.
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On lower pay my first priority would be to reduce marginal rates for those between £10k – £20k who often have very high marginal rates when benefit withdrawal is taken into account – sometimes earning £1 for every hour worked.
To Oliver Craven: Yes, but rolling NICs into Income Tax isn’t happening anytime soon, so that’s why this is a good first step.
To David Raw: Older people don’t support us anyways. Our voters are typically under-65s. It’s not about revenge, it’s about generational fairness and ultimate reform. I notice that you completely ignored me saying I want to raise the NICs thresholds.
To Michael: Could possibly do that, however, I prefer other methods myself as outlined in the article. I agree re marginal rates due to benefit changes.
Some good points in your article Tom, although I do not share the conclusion.
There is a good account of the history of national insurance since Beveridge in this select committee report on the contributory principle https://publications.parliament.uk/pa/cm199900/cmselect/cmsocsec/56/5605.htm
When National insurance was first introduced by Lloyd George in 1911 it was a contributory form of insurance against illness and unemployment, and eventually provided retirement pensions and other benefits. The schene was based o the social security introduced by Bismarck in Germany in the late 19th century. Initially there were two schemes running alongside each other, one for health and pension insurance benefits (administered by “approved societies” including friendly societies and some trade unions) and the other for unemployment benefit which was administered directly by Government. The Beveridge Report in 1942 proposed expansion and unification of the welfare state under a scheme of what was called social insurance.
After the Second World War, the Attlee government pressed ahead with the introduction of the Welfare State, of which an expanded National Insurance scheme was a major component. As part of this process, responsibility passed in 1948 to the new Ministry of National Insurance. At that point, a single stamp was introduced which covered all the benefits of the new Welfare State.
Stamp cards for class 1 (employed) contributions persisted until 1975 when these contributions finally ceased to be flat-rate and became earnings related, collected along with Income Tax under the PAYE procedures.
As the system developed, the link between individual contributions and benefits was weakened and there remains little link today.
National Insurance has outlived its usefulness and was never implemented in the way Beveridge intended. Tinkering with the system creates as many problems as solutions as the basis of assessment differs from that of income tax.
As the Mirrlees report noted, tinkering is what has created the mess of a tax system we have today when what is required is roort and branch reform.
The logical solution is to role income tax and national insurance into a flat rate taxable on all sources of income. To ensure maximum progressivity there should be a personal allowance ast least equal to the living wage with higher rates of income tax being replaced with a progessive land value tax.
I agree with Oliver Craven that employee’s NICs should be rolled into income tax. It seems strange to me that earned income is taxed more heavily than unearned. also there is no reason why pensioners with large incomes shouldn’t also contribute to things like the NHS. And don’t get me started on the injustice of how wealth is taxed so much more lightly than income!
Although I agree that no one should be paying tax (or NI) on the minimum wage, I am concerned that increasing allowances does create a problem with fewer and fewer people paying for services used by all. Too often people who aren’t contributing themselves demand more from those who are, I don’t know the answer to this paradox.
@ Tom Purvis “Older people don’t support us anyways. ”
What a sweeping generalisation which totally undermines your credibility. You ignore the fact that the retired age groups have a much higher propensity to turn out to vote.
I suggest you do an age survey of the party membership if you attend Conference.
Having said all that, I’m sure that one of our former Leaders would, from time to time over a number of years, have preferred National Insurance cards to have been abolished in certain cases.
As a matter of fact – in the most recent yougov poll we are on 9% with 65+ age group against an overall rating of 9% (we do worst with 18-24s). And most other polls are in line with this.
On raising NICs for higher paid – I am not necessarily arguing for the full 12% that the rest of us pays – but above the 2% – we are always told that it is those with the broadest shoulders that should carry the biggest burden – clearly this is another tax where this doesn’t apply.
On older people – given NICs does pay partly for the NHS – and OK we don’t have earmarked taxes – it does make sense for a reduced rate of NICs for pensioners. On that part of NICs that go on pensions (and OK it is not strictly speaking earmarked) it does make sense for people not to go on paying after state pension age.
David Raw – ‘That’s not reforming NIC – it’s putting it up for the over 65’s and the retired. Delete reform – insert extend.’
Sorry I don’t understand from your post – what is wrong with extending NICs to the over 65s. Leaving aside that many of those have had the sweetest of intergenrational deals, what exactly is so different about someone on their 65th birthday.
Your argument as I understand you is that NICs should not be charged on the over 65s for electoral reasons?
@ Jackie No, it’s for more than electoral reasons. You propose a new additional discriminatory cost on older persons at a time when they face a reduction in income on retirement and increased costs as ageing affects their health and mobility.
Now, if you proposed an income tax rise based on levels of income reflecting ability to pay I’d be more enthusiastic.. but the post smacks of back of a fag packet calculations without any real research on the impact. Let’s have some evidence instead of wild remarks like, “Older people don’t support us anyways (sic).”
I have made NIC contributions for 49 years as well as income tax so I’ve probably contributed over the years a great deal more than you have.
Evidence based mature policies please.
@LJP re: what is wrong with extending NICs to the over 65s.
I think my comment here [ https://www.libdemvoice.org/ifs-calls-peak-pensioner-and-falling-inequality-57886.html#comment-474398 ] might provide some information as to the issue. Personally, I have no problem paying NIC before I retire (at 70’ish), post- retirement I have some reservations for reasons you can infer from my referenced comment. I assume David’s use of 65 is because currently the government is giving an employment sweetener to those who’s retirement age has been extended beyond 65 for men and 60 for women.
We should abolish Employer NICs and replace them with a simple tax on turnover.
At a time when we are getting concerned about automation and AI displacing employment, it makes no sense to tax companies for the privilege of employing actual human beings.
A tax on turnover would ensure that even highly automated companies would contribute to the cost of maintaining the infrastructure and social fabric of our country.
Picking up on Joe’ Bourkes comment, I think we need to go into a little more detail about the intended purpose of NICs, namely the funding of state benefits and pension.
It is clear that funding the NHS, isn’t really a benefit and so should be funded out of general taxation. Which leave us with welfare benefits and state pension, both of which currently use the duration over which contributions have been made to determine entitlement.
Given the ending of SERPS and the move to a flat-rate pension for all (aka a CBI for retired people), the entire relationship between NICs and state pension is open to reconsideration. However, it might be useful to keep a state pension deduction on payslips.
Likewise for work-related benefits, in the absence of a CBI for workers, it may be useful
to retain a welfare benefits contribution line item.
However, in retaining payslip line items, I suggest we also need to set up funds into which these monies are paid (especially the pension contributions), yes these ‘sovereign’ funds may invest in government projects, but I suspect people will treat them differently if they see their contributions invested and thus having a return reported, rather than being paid straight out as normal expenditure.
David Raw – ‘I have made NIC contributions for 49 years as well as income tax so I’ve probably contributed over the years a great deal more than you have.’
Well that touched on a *Raw* nerve didn’t it.
Sorry to disappoint, but no, it didn’t.
Just a reflection that there’s an evidence based policy vacuum in the modern Lib Dems – a view shared by at least 92% of the electorate.
As a fairly well-off middle-class retiree of some years, I am very supportive of the idea that people like me should pay more tax. We are showered with benefits, often for good reasons ( of them, only the state pension is taxable), but the problem with means-testing benefits is than many hard-up elderly, for a number of understandable reasons won’t claim them. Probably, income tax is easiest way of collecting more from all, including people like me. I was astounded to discover I was no longer paying National Insurance on my pay when I reached state retirement age, so there is a gap there. Also the upper limit of pay due for National Insurance doesn’t seem right either.
Do we need a policy working party to dig through the evidence and the detail and bring a coherent policy to Conference?
Because of my pension I just fall into the higher tax bracket on my part time earnings of 5k a year, that’s £4 tax on £10 an hour before the NI contribution. I am having to wait an additional 6 years for my state pension as is my wife who receives a small private pension. Because of my tax status I cannot claim part of her tax allowance. I believe I make my contribution and don’t want to pay any more. Maybe our good Lords might agree to pay tax on their daily allowances, now there’s an idea.
“the problem with means-testing benefits is than many hard-up elderly, for a number of understandable reasons won’t claim them.”
And they involve horrendous bureaucracy in implementing them.
Ian Sanderson,
“Do we need a policy working party to dig through the evidence and the detail and bring a coherent policy to Conference?” – Yes, but has to have both tax and benefits policy within the scope of its remit to be effective.