For decades, lancing the ugly boil of National Insurance from the none-too-pretty face of the British tax system has been on the wishlist of tax reform campaigners and payroll professionals. The complicated system of weekly ‘contributions’ has long since twisted out of its original insurance shape into the current reality of being just another tax on income. Different rules on things such as when it’s applied, who is liable, what is ‘employment’ and what’s allowable as an expense make for a nightmarishly fiddly system that’s a major headache for employers and anyone trying to work out how much they have to pay.
Employer’s National Insurance, the so-called ‘jobs tax’, is particularly unpleasant due to its nature of ultimately being paid for by workers in the form of depressed wage levels while procedurally being a charge landed on employers. That disconnect between the employer who writes the cheque to HMRC and the employee who ends up being worse off because the economic burden is passed on to him via lower wages means it’s particularly lacking in the transparency and simplicity that taxpayers have a right to demand from the system that confiscates their money.
But which Chancellor wants to be the one to whip out the scalpel and do the deed? Many groups would potentially face a nasty tax hike from a poorly thought-through plan to merge National Insurance with Income Tax. Pensioners, the self-employed, people with two jobs or fluctuating incomes are among those who now benefit from advantages over regular employees in standard PAYE employment, who have to pay more. The status quo is certainly unfair on regular employees, but those who do nicely out of it have every right to object to being lumbered with any more tax.
Fortunately, it is possible to design a reform that merges the two systems into one while still protecting pensioners, the self-employed and other groups. The TaxPayers’ Alliance has published How to abolish National Insurance, a detailed, three-step plan showing how it can be done.
Let’s look at pensioners. The first thing to note is that merging National Insurance should only apply to labour income. Income from capital, including pensions, should carry on under the same system as now. People over the State Pension Age now benefit from not having to pay employee’s National Insurance. But employers do have to carry on paying 13.8 per cent National Insurance on pensioners’ earnings. That means the effective marginal rate of tax for pensioners on their labour cost is now 29.7 per cent, once employer’s National Insurance has been factored in. We propose to cut it to 11 per cent and then again to 10 per cent, leaving pensioners with a new effective rate of 27.3 per cent. And we propose three mechanisms that will protect pensioners so they benefit from a tax cut in addition to the rate cuts I just described.
Firstly, higher allowances. At present, employer’s National Insurance is payable above just £144 per week, equivalent to £7,488 a year. We propose to raise that to around £10,600 depending on inflation. Secondly, higher wages. We propose that at the same time as abolishing employer’s National Insurance, employers should increase pay in April 2017 by the same amount that they paid in the previous year. Thirdly, a reduced special rate. We propose replacing the 27.3 per cent effective rate with a special reduced rate for pensioners of 27 per cent after April 2017.
The self-employed will be protected, too. Currently, they pay £2.65 per week plus 9 per cent on profits above £7,605 but below £42,475 a year, plus Income Tax at 20 per cent between £8,105 and £42,475. Instead, we propose a simple self-employed basic rate of 30 per cent above a single personal allowance of around £10,600, depending on inflation.
These more generous allowances and lower rates mean that all people with fluctuating incomes and all people with two jobs will be better off, too. The paper shows in detail that serious reform to abolish National Insurance is practical and realistic and can deliver the transparency and simplicity we need from our tax system. There is one small group who would be worse off under our proposals: those with three of more separate jobs with medium total incomes. That’s unfortunate. But it’s because the tax system now unfairly advantages them over regular employees for no good reason. No Chancellor would relish slapping higher taxes on pensioners and the self-employed. But one who implements our plan will find it a lot easier to argue that it’s unfair to charge more tax on people earning low incomes and less tax on people earning high incomes just because the lower earners have one job and the higher earners have many.
It’s time for George Osborne to lance the boil once and for all. Abolish National Insurance, Mr Osborne. Our new paper can show you how.