Combining tax and National Insurance

The Conservatives are reported to be considering combining tax and National Insurance contributions; the move has apparently been postponed because of complications in combining computer systems.  There is a much fuller discussion in a parliamentary paper.

There are three separable issues here.  The first question is a matter of principle:  whether it makes sense to keep a distinct contribution for National Insurance.  One of the arguments made immediately in this respect can be dismissed, that the NI contributions pay for the health service; they don’t.   The insurance-based health system came to an end in 1948.  Four-fifths of contributions, Currently £85bn, go into the NI fund (itself an accounting fiction); the residual contribution from National Insurance to the NHS is about £21bn, roughly a sixth of health service costs.   There are good reasons to keep a major contributory element in the system, to cover (for example) unemployment, pensions, sickness benefits and long-term care.  Contributions are seen as a way of ‘earning’ benefits, and of legitimating them; they are also much easier to validate than means-tests.  However, that does not depend on using distinct, separate mechanisms for levying contributions – all that matters is what gets recorded on the wage slip.  It would be perfectly possible for the first 15% or 20% of tax to be described as “National Insurance”, and to be recorded as  contribution,  even if the systems were unified.

The second issue is a question of equity.  NI contributions at present are regressive: they cut in long before the tax threshold, affecting people on fairly low incomes, and they stop for higher rates of income (which means that richer people don’t pay as much).  One of the basic objections from the point of view of the Conservatives is that an equitable combined system would levy much more from higher earners – probably more than 50% on the top rate.  It’s also been objected that pensioners would have to be exempted – but they don’t have to be.  It is perfectly sensible for pensioners on higher incomes to pay something towards long-term care and for other people’s pensions.     That could be achieved simply enough by exempting only one element of a pensioner’s income, the basic State Pension.

The third issue is about the practicalities.  The question of computer systems is something of a smokescreen – if the systems were genuinely combined they would operate from the same system, and most calculations would be done by empoyers in any case.  It’s more important that National Insurance does something distinct from tax, which is to police employment  for people on lower incomes and  (in particular) immigrant labour.

The parliamentary report also emphasises an aspect of National Insurance contributions that must be important to chancellors of any party; NI is not identified or recognised as a tax.  A combined rate would be.

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