150723 National Insurance
  • Not a tax, still a tax. National Insurance has never quite been the same as other taxes, so politicians avoid describing it as such. Its revenues are mostly paid into a special fund that then goes towards contributory benefits. You put your money in, you take your money out. But it is really so simple? According to the Institute for Fiscal Studies, “in practice, contributions paid and benefits received bear little relation to each other for any individual contributor, and the link has weakened over time.” That makes it sound much more like other taxes. You put your money in… it dissipates.
  • The 1.3 million. Which is why it’s galling to hear that x-many million people are being “lifted out of tax”, when they are still paying employees’ National Insurance Contributions. The threshold for Income Tax now starts at £10,600 a year, whereas National Insurance starts sooner at £8,060. This decoupling of the two levies, as the Coalition government raised the Personal Allowance, has left more and more people paying just the one. The graph at the top of this post, using figures taken from this excellent Resolution Foundation briefing, shows that 1.3 million people now stump up for National Insurance but not for Income Tax. Eight years ago, it was zero.
  • A de facto Living Wage… This seems particularly perverse when considered alongside minimum and living wages. Someone working for the National Minimum Wage (£6.50 an hour) for the average number of hours (37.5 a week) would earn £12,675 a year, but only get to keep £11,706 after tax. For someone working the same hours on the current Living Wage of £7.85, their earnings of £15,307 are reduced to £13,496. But imagine if the Minimum Wage earner weren’t just spared from paying Income Tax but also National Insurance. That would bring his post-tax (i.e. untaxed) income of £12,675 a year much closer to the post-tax income of the Living Wage earner. As I’ve said before, the Government could introduce a de facto Living Wage at a stroke.
  • …and a cheaper de jure Living Wage. Or, to put it another way, the Living Wage could be reduced by a full 73 pence to £7.12. That would leave its recipients with the same amount of post-tax income as before, if Minimum Wage earners were simultaneously delivered from Income Tax and National Insurance.
  • Mergers all round. ConservativeHome wasn’t alone when it called, in its pre-election manifesto, for the Income Tax and National Insurance thresholds to be brought together. But familiarity oughtn’t diminish the idea. As George Osborne looks into merging the two levies completely, it remains true that he should complete this other merger first.