There’s a tax the chancellor doesn’t mention: it’s national insurance

Dr Mark Wright with his team on the Liver Ward at St. Mary's Hospital, Southampton
The old principle – that NI paid for your pension and healthcare – is a fiction. Photograph: Felix Clay for the Guardian

Every chancellor talks about tax-cutting, George Osborne more than most. Each of his budget speeches has been laced with claims about how many people he has taken out of paying tax by raising the personal allowance. And it’s largely true: the total amount paid in income tax in the UK was £132.2bn when Osborne became chancellor in 2010-11. By 2014-15 it had risen to £139.5bn, an increase of 5.5% but less than inflation over the same period. But the reason why your pay packet still seems to have the same or more tax coming out is that other bit of income tax Osborne doesn’t like talking about. It’s called national insurance, and since Osborne became chancellor he has increased the NI take from £96.5bn to £110.4bn. For every extra £1 Osborne has taken in income tax, he has grabbed £2 more in NI.

In this week’s budget he used the same sleight of hand: he banged on about taking loads of people out of the 40% higher rate tax band, in a saving worth £400 to the “squeezed middle”, while quietly raising NI on the side. As Mark Seaden of accounting firm BDO points out: “The increase in the upper earnings limit for NI will see £200 of these savings eroded for those earning over £45,000.” Osborne has also frozen the starting point for NI from April 2016, which inevitably means that more people will be pulled into paying it, in what economists call “fiscal drag”.

National insurance is a complete mess. The old principle – that NI was a sort of insurance that paid for your pension and healthcare, and gave you cover if you were unemployed – is a fiction. The money simply goes into the general tax pot, and if the chancellor were honest it would be labelled as a tax on pay. But that would mean telling the truth: that the basic rate of tax is not 20% but 32%.

What’s more, if the starting threshold for NI for 2016-17 (£8,060) was brought up to match the starting threshold for income tax (£11,000) it would cost the Treasury at least £6bn. Instead, we maintain the idea that income tax starts at £11,000 of earnings.

What’s to be done? Treat us like grownups, scrap NI and raise the basic rate of income tax from 20% to 32%? We can be pretty sure that that budget speech will never be heard.

Maybe we should look at returning to the principles behind the original 1911 National Insurance Act, which introduced sick-leave payments, a rudimentary health service and unemployment payments for working people. It was run on actuarial lines – you (and your employer) paid into a fund that would pay out should the person fall ill or lose their job. The contributory principle was at its core: you only received benefits if you paid in.

Those principles remain at the heart of most European welfare state models, but have become muddled in the UK. In Germany, unemployment benefit is 60% of the worker’s former pay, but only if contributions have been paid in. In the UK, it’s an absurdly low £73.10 a week, and less if you are under 25. Our low flat-rate benefits reflect the fact that it is universally available, irrespective of contributions. It’s the same with health – I know a self-employed Brit in Germany who regularly returns to the UK for NHS treatment because he hasn’t built up a sufficient record in Germany. Critics say, somewhat crudely, that we have a “something for nothing” welfare system, while Germany has a “something for something” system.

The contribution principle has the advantage of properly recognising individual payments, but is also riddled with challenges, not least that we don’t live in a world of full employment (joblessness was just 3% at the time of the 1911 act), leaving far too many outside the welfare net.

But this muddling on with NI can’t go on forever. Let’s stop playing pretend and either make it genuinely contributory – or be honest and bring it into the income tax system.

[Source:- Gurdian]