NICs and the contributory retirement benefits system.
The article by Sarah Gabbai (‘Five proposed structural changes to the UK tax system’, Tax Journal, 24 July 2020) had one factual inaccuracy plus a general lack of understanding of the national insurance system.
Ms Gabbai wrongly stated that the employer’s contributions do not support the benefits. You have only to look at the official documents relating to the scheme (accounts, regulations, legislation, uprating reports) to see that this is not the case. Apart from the part of the contributions apportioned to the NHS, all NICs go to the support of the benefits.
The main benefit supported by NICs is the contributory retirement pension. This is the main source of support for most people in retirement and is possibly the most popular government programme after the NHS. Any changes in entitlement and amounts would be a major political issue. Changing the source of the funding would, of necessity, change entitlements. In these circumstances, there are inevitably winners and losers. It will not be a trivial change, as Ms Gabbai suggests, to change the funding to a non-contributory system and to suggest that such a major change is made to solve a completely unrelated issue (one related to employment law) verges on the irrational.
It seems to me that tax specialists insist on regarding NICs as ‘just another tax’ and do not recognise that it is part of the national insurance system. The fact that it is a system means that you cannot change one part without knock-on effects on other parts and you should not treat the funding as a stand-alone issue. If you want to discuss the structure of state pensions, you should do it in its entirety.
Ms Gabbai also mentions the possibility of charging contributions on income rather than earnings. This has some merits but it must be done by recognising that payment is related to entitlement and people should only pay for benefits that they are gaining entitlement to. For example, asking people who are receiving their state pension to continue to pay full contributions is intrinsically unfair: it is like asking someone to continue to pay into their private pension after it has vested. However, there is merit in asking people to continue to pay the NHS part of the contribution. I would refer people to the system in Guernsey.
Irene Lane, former actuary
The author replies:
Ms Lane makes some interesting points about NICs and the contributory benefits system, but I would like to address her specific criticisms.
Regarding a comment I made in connection with my suggestion for a new payroll levy, I stated that employer’s NICs, unlike employee’s NICs, are unconnected to the financing of contributory benefits. It was never my intention to suggest that the benefits themselves are not funded out of employers’ NICs, as they clearly are. (Perhaps the words ‘entitlement to’ instead of ‘financing of’ might have made things clearer.)
Ms Lane also suggests I recommended changing the funding to a non-contributory system. I made no such recommendation. I queried whether a full-scale merger of NICs with income tax would make more sense than an alignment, leaving it an open question for policymakers and experts to determine the relationship between individuals’ payment of NICs and entitlement to contributory benefits.
NICs and the contributory retirement benefits system.
The article by Sarah Gabbai (‘Five proposed structural changes to the UK tax system’, Tax Journal, 24 July 2020) had one factual inaccuracy plus a general lack of understanding of the national insurance system.
Ms Gabbai wrongly stated that the employer’s contributions do not support the benefits. You have only to look at the official documents relating to the scheme (accounts, regulations, legislation, uprating reports) to see that this is not the case. Apart from the part of the contributions apportioned to the NHS, all NICs go to the support of the benefits.
The main benefit supported by NICs is the contributory retirement pension. This is the main source of support for most people in retirement and is possibly the most popular government programme after the NHS. Any changes in entitlement and amounts would be a major political issue. Changing the source of the funding would, of necessity, change entitlements. In these circumstances, there are inevitably winners and losers. It will not be a trivial change, as Ms Gabbai suggests, to change the funding to a non-contributory system and to suggest that such a major change is made to solve a completely unrelated issue (one related to employment law) verges on the irrational.
It seems to me that tax specialists insist on regarding NICs as ‘just another tax’ and do not recognise that it is part of the national insurance system. The fact that it is a system means that you cannot change one part without knock-on effects on other parts and you should not treat the funding as a stand-alone issue. If you want to discuss the structure of state pensions, you should do it in its entirety.
Ms Gabbai also mentions the possibility of charging contributions on income rather than earnings. This has some merits but it must be done by recognising that payment is related to entitlement and people should only pay for benefits that they are gaining entitlement to. For example, asking people who are receiving their state pension to continue to pay full contributions is intrinsically unfair: it is like asking someone to continue to pay into their private pension after it has vested. However, there is merit in asking people to continue to pay the NHS part of the contribution. I would refer people to the system in Guernsey.
Irene Lane, former actuary
The author replies:
Ms Lane makes some interesting points about NICs and the contributory benefits system, but I would like to address her specific criticisms.
Regarding a comment I made in connection with my suggestion for a new payroll levy, I stated that employer’s NICs, unlike employee’s NICs, are unconnected to the financing of contributory benefits. It was never my intention to suggest that the benefits themselves are not funded out of employers’ NICs, as they clearly are. (Perhaps the words ‘entitlement to’ instead of ‘financing of’ might have made things clearer.)
Ms Lane also suggests I recommended changing the funding to a non-contributory system. I made no such recommendation. I queried whether a full-scale merger of NICs with income tax would make more sense than an alignment, leaving it an open question for policymakers and experts to determine the relationship between individuals’ payment of NICs and entitlement to contributory benefits.
