A truly bold chancellor would scrap national insurance, said Patrick Collinson in The Guardian on 22 February 2020. Is there any likelihood that Rishi Sunak will take such a bold step in his first Budget, on 11 March? Somehow, I doubt it.
The Guardian summarises the history of national insurance contributions (NICs), which dates back to 1911, and accurately comments that at its core is the contributory principle: ‘the idea that when you pay, you are making a designated contribution, with entitlements such as a state pension and unemployment benefits’.
Of course, the contributory principle is increasingly illusory: pensions, in particular, are funded on a ‘pay as you go’ basis, and the move to the new state pension has further weakened the link to contributions. Indeed, the anger of the so-called WASPI (Women against State Pension Inequality) campaign is based on the misconception that women born in the 1950s have had their pensions taken away from them, when in reality nobody has a government pension pot labelled with their name.
NICs are one of the three largest contributors to government revenues, raising an estimated £143bn in 2019/20, compared to £196bn from income tax and £137bn from VAT. Together, these three taxes account for almost 60% of total receipts by government.
But merging NICs with income tax would be, as Sir Humphrey might say, a brave decision by a chancellor. In 2017, a previous chancellor, Philip Hammond, cancelled plans to increase NICs for the self-employed, in what The Guardian described as ‘a humiliating U-turn just a week after the measure formed the centrepiece of his first budget’. And that change was a relatively minor one, increasing class 4 NICs from 9% to 11%, which would have helped to narrow the gap between NICs on the employed and self-employed, particularly now that both have the same access to the state pension.
The key problem was that the Conservative manifesto had pledged to make ‘no increases in VAT, national insurance contributions or income tax’ – and the 2019 manifesto contains a very similar pledge which significantly constrains Sunak’s room for manoeuvre.
In 2018, the government also decided not to proceed with the abolition of class 2 NICs, which I wrote about at the time. That was also a relatively small change, but it was difficult to implement because it would have had ‘negative impacts’ on some of the very low paid.
That is not to say that NICs should not be reformed. At the most basic level, there are many relatively small differences between the calculation of NICs and income tax, and in 2016 the Office of Tax Simplification proposed that these should be removed. However, the chancellor’s response dealt mainly with the more minor points, and only committed to keeping the more significant points ‘under review’.
One of the more major points is the difference between the NICs burden for the employed and self-employed. As the IFS has pointed out, ‘the UK tax system attaches a significant tax penalty to work that occurs through employment’. The lower NICs burden for the self-employed is equivalent to a subsidy of around £1200 per self-employed person per year. But increasing the NICs on the self-employed would be extremely unpopular, while reducing NICs for employees would be expensive. Neither option is likely to be attractive to a new chancellor.
However, this disparity drives behaviour which causes other problems in the tax system. As I pointed out last year, the difference in NICs underlies the popularity of personal service companies, and hence all the many issues with IR35. The changes which are set to come in from April 2020, placing the obligation to determine employment status on the ultimate engager, will do nothing to address the underlying problem that the tax system effectively incentivises people to claim self-employed status.
And to return to the vexed topic of the loan charge, many of the schemes which were sold to contractors claimed to have been designed mainly to remove the hassle and uncertainty of IR35 compliance – although they have proved to give rise to much greater difficulties for many of those who entered into them.
So, reforming NICs for the self-employed would be a valid objective for a bold chancellor. But what if he boldly went even further, and merged NIC and income tax completely? In that case, he would not only upset the self-employed, he would almost certainly lose a lot of pensioners’ votes. While those above state pension age may pay income tax, they do not pay NICs, except for class 4 contributions by the self-employed for the period up to the 5 April following pension age, as set out (although not very clearly) in the Gov.uk guidance. So, applying NICs to all income would immediately significantly raise the burden on pensioners.
Arguably, it is logical that NICs should not be paid on state pension income, as part of the (relatively weak) contributory principle is that the NICs pay for the state pension, so it should not be charged when you draw the income. But contributions to personal pensions can be deducted for NICs (if made via salary sacrifice), so is it logical that the income is exempt as well? And is there really any logic in not charging NICs if a pensioner still has some earned income?
I would like to see Sunak taking an evidence-based approach to his first Budget (and to subsequent ones) and over time, to make the imposition of NICs more logical.
But somehow, I doubt that he will be as logical as Mr Spock, and boldly go where no chancellor has gone before
A truly bold chancellor would scrap national insurance, said Patrick Collinson in The Guardian on 22 February 2020. Is there any likelihood that Rishi Sunak will take such a bold step in his first Budget, on 11 March? Somehow, I doubt it.
The Guardian summarises the history of national insurance contributions (NICs), which dates back to 1911, and accurately comments that at its core is the contributory principle: ‘the idea that when you pay, you are making a designated contribution, with entitlements such as a state pension and unemployment benefits’.
Of course, the contributory principle is increasingly illusory: pensions, in particular, are funded on a ‘pay as you go’ basis, and the move to the new state pension has further weakened the link to contributions. Indeed, the anger of the so-called WASPI (Women against State Pension Inequality) campaign is based on the misconception that women born in the 1950s have had their pensions taken away from them, when in reality nobody has a government pension pot labelled with their name.
NICs are one of the three largest contributors to government revenues, raising an estimated £143bn in 2019/20, compared to £196bn from income tax and £137bn from VAT. Together, these three taxes account for almost 60% of total receipts by government.
But merging NICs with income tax would be, as Sir Humphrey might say, a brave decision by a chancellor. In 2017, a previous chancellor, Philip Hammond, cancelled plans to increase NICs for the self-employed, in what The Guardian described as ‘a humiliating U-turn just a week after the measure formed the centrepiece of his first budget’. And that change was a relatively minor one, increasing class 4 NICs from 9% to 11%, which would have helped to narrow the gap between NICs on the employed and self-employed, particularly now that both have the same access to the state pension.
The key problem was that the Conservative manifesto had pledged to make ‘no increases in VAT, national insurance contributions or income tax’ – and the 2019 manifesto contains a very similar pledge which significantly constrains Sunak’s room for manoeuvre.
In 2018, the government also decided not to proceed with the abolition of class 2 NICs, which I wrote about at the time. That was also a relatively small change, but it was difficult to implement because it would have had ‘negative impacts’ on some of the very low paid.
That is not to say that NICs should not be reformed. At the most basic level, there are many relatively small differences between the calculation of NICs and income tax, and in 2016 the Office of Tax Simplification proposed that these should be removed. However, the chancellor’s response dealt mainly with the more minor points, and only committed to keeping the more significant points ‘under review’.
One of the more major points is the difference between the NICs burden for the employed and self-employed. As the IFS has pointed out, ‘the UK tax system attaches a significant tax penalty to work that occurs through employment’. The lower NICs burden for the self-employed is equivalent to a subsidy of around £1200 per self-employed person per year. But increasing the NICs on the self-employed would be extremely unpopular, while reducing NICs for employees would be expensive. Neither option is likely to be attractive to a new chancellor.
However, this disparity drives behaviour which causes other problems in the tax system. As I pointed out last year, the difference in NICs underlies the popularity of personal service companies, and hence all the many issues with IR35. The changes which are set to come in from April 2020, placing the obligation to determine employment status on the ultimate engager, will do nothing to address the underlying problem that the tax system effectively incentivises people to claim self-employed status.
And to return to the vexed topic of the loan charge, many of the schemes which were sold to contractors claimed to have been designed mainly to remove the hassle and uncertainty of IR35 compliance – although they have proved to give rise to much greater difficulties for many of those who entered into them.
So, reforming NICs for the self-employed would be a valid objective for a bold chancellor. But what if he boldly went even further, and merged NIC and income tax completely? In that case, he would not only upset the self-employed, he would almost certainly lose a lot of pensioners’ votes. While those above state pension age may pay income tax, they do not pay NICs, except for class 4 contributions by the self-employed for the period up to the 5 April following pension age, as set out (although not very clearly) in the Gov.uk guidance. So, applying NICs to all income would immediately significantly raise the burden on pensioners.
Arguably, it is logical that NICs should not be paid on state pension income, as part of the (relatively weak) contributory principle is that the NICs pay for the state pension, so it should not be charged when you draw the income. But contributions to personal pensions can be deducted for NICs (if made via salary sacrifice), so is it logical that the income is exempt as well? And is there really any logic in not charging NICs if a pensioner still has some earned income?
I would like to see Sunak taking an evidence-based approach to his first Budget (and to subsequent ones) and over time, to make the imposition of NICs more logical.
But somehow, I doubt that he will be as logical as Mr Spock, and boldly go where no chancellor has gone before
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