Why the merging of income tax and NICs would be a mistake.
It is often said when four economists get together and agree on a prediction, it is bound to be wrong. Just look at the predictions for the recession, which seems to have gone awry along with the prediction of sky-high energy prices staying for a number of years. A gloomy IMF prediction spurs me to maximise my ISA and start investing (this is not investment advice!)
I might add to this rule that when four tax experts get together and agree on a conclusion that one needs to be suspicious. Remember how Theresa May adopted a number of recommendations from the Institute for Fiscal Studies in 2017 with the result that she turned the predicted landslide victory into a precarious minority government. There is no subject of tax reform that most tax ‘experts’ seem to agree on more than national insurance should be integrated with income tax.
I would respectfully disagree and believe that this would be a calamitous mistake. I take a sceptical review of tax reform at the best of times and have an innate suspicion that if a system has been going since 1911, radically changing it needs to show large tangible benefits for it to be worthwhile.
In this case, the merging of income tax and national insurance – or more accurately, the abolition of NIC – would be an egregious mistake.
First of all, its timing could not be worse. At present, the UK suffers from a substantial number of individuals having left the labour market and the last thing the UK economy needs is more older people leaving the labour market because of an increase of 12% in the charges that they pay.
Secondly, the NIC system has been used to advantage apprentices, young people as well as older people for reasons of encouraging certain activities in the labour market. These motivations would exist even if NIC were abolished, albeit that the method of achieving these incentives would need to be rethought.
Third, the requirement to pay NIC is linked to a number of contributory benefits. If you don’t contribute to the system, you cannot achieve these benefits. It is inaccurate to say that the contributory system is broken. Most importantly, generations have grown up knowing that if they pay into the NIC system they will receive a pension based on the years of service. One needs 35 years of either NIC contributions or credits in order to receive a full state pension. Accordingly, the national insurance system has the facility to make voluntary payments, either class 2 or class 3, to maintain the entitlement to pensions.
The benefits dependent on a record of contributions are: basic state pension; additional state pension; new state pension; new style jobseeker’s allowance; contribution-based employment and support allowance; maternity allowance; and bereavement support payment.
If you take this away, then a system which is known and has been implicitly trusted by the UK workforce will lose credibility. Economists may point out that this all goes into the same pot of government revenue but there is a linkage in the public’s mind between their contributions and the pensions they received. UK pensions have generally been lower than pensions in other comparable European countries, partly because social contributions have been less but also because the state expects you to make up the difference in private pension contributions. If national insurance and income tax was merged and contributory payments were lost, there would immediately be voices that richer people would not receive pensions. This has already been voiced by some think-tanks and economic magazines. I cannot think of a better way of ruining people’s faith in government provision. What would be next, confiscating auto-enrolment pension amounts?
Finally, although there are significant similarities between income tax and national insurance, the UK is part of an extensive network of social security arrangements with foreign countries, including the European Economic Area. Merging income tax and national insurance would have a severe knock on effect on those agreements, making it more difficult both for foreign workers coming to the UK and UK workers seconded abroad.
Altogether, this is a proposal which may superficially seem attractive but if you decide to look at the contents of the proposal, all you will get is a venomous can of snakes.
Home >Articles > Against the grain: the case for saving national insurance
Against the grain: the case for saving national insurance
Why the merging of income tax and NICs would be a mistake.
It is often said when four economists get together and agree on a prediction, it is bound to be wrong. Just look at the predictions for the recession, which seems to have gone awry along with the prediction of sky-high energy prices staying for a number of years. A gloomy IMF prediction spurs me to maximise my ISA and start investing (this is not investment advice!)
I might add to this rule that when four tax experts get together and agree on a conclusion that one needs to be suspicious. Remember how Theresa May adopted a number of recommendations from the Institute for Fiscal Studies in 2017 with the result that she turned the predicted landslide victory into a precarious minority government. There is no subject of tax reform that most tax ‘experts’ seem to agree on more than national insurance should be integrated with income tax.
I would respectfully disagree and believe that this would be a calamitous mistake. I take a sceptical review of tax reform at the best of times and have an innate suspicion that if a system has been going since 1911, radically changing it needs to show large tangible benefits for it to be worthwhile.
In this case, the merging of income tax and national insurance – or more accurately, the abolition of NIC – would be an egregious mistake.
First of all, its timing could not be worse. At present, the UK suffers from a substantial number of individuals having left the labour market and the last thing the UK economy needs is more older people leaving the labour market because of an increase of 12% in the charges that they pay.
Secondly, the NIC system has been used to advantage apprentices, young people as well as older people for reasons of encouraging certain activities in the labour market. These motivations would exist even if NIC were abolished, albeit that the method of achieving these incentives would need to be rethought.
Third, the requirement to pay NIC is linked to a number of contributory benefits. If you don’t contribute to the system, you cannot achieve these benefits. It is inaccurate to say that the contributory system is broken. Most importantly, generations have grown up knowing that if they pay into the NIC system they will receive a pension based on the years of service. One needs 35 years of either NIC contributions or credits in order to receive a full state pension. Accordingly, the national insurance system has the facility to make voluntary payments, either class 2 or class 3, to maintain the entitlement to pensions.
The benefits dependent on a record of contributions are: basic state pension; additional state pension; new state pension; new style jobseeker’s allowance; contribution-based employment and support allowance; maternity allowance; and bereavement support payment.
If you take this away, then a system which is known and has been implicitly trusted by the UK workforce will lose credibility. Economists may point out that this all goes into the same pot of government revenue but there is a linkage in the public’s mind between their contributions and the pensions they received. UK pensions have generally been lower than pensions in other comparable European countries, partly because social contributions have been less but also because the state expects you to make up the difference in private pension contributions. If national insurance and income tax was merged and contributory payments were lost, there would immediately be voices that richer people would not receive pensions. This has already been voiced by some think-tanks and economic magazines. I cannot think of a better way of ruining people’s faith in government provision. What would be next, confiscating auto-enrolment pension amounts?
Finally, although there are significant similarities between income tax and national insurance, the UK is part of an extensive network of social security arrangements with foreign countries, including the European Economic Area. Merging income tax and national insurance would have a severe knock on effect on those agreements, making it more difficult both for foreign workers coming to the UK and UK workers seconded abroad.
Altogether, this is a proposal which may superficially seem attractive but if you decide to look at the contents of the proposal, all you will get is a venomous can of snakes.
