To continue my series on reforms a progressive government should introduce in the UK, this one should make complete sense. And for those who wonder why I do not say get rid of national insurance altogether, or simply cut it out for lower-paid employees, this suggestion presumes that we keep the contributory principle within the social security system. If that changed, so would this recommendation:
Reducing the rate of national insurance for those on low earnings
Those on low earnings in the UK face very high marginal rates of tax because of the interaction of the income tax, national insurance and benefits systems, whichever version might apply to them. There is no easy answer to this problem, but one option that would help would be to apply a lower rate of national insurance to the first £10,000 of earnings subject to national insurance. National insurance is payable on earnings over £6,136 per annum in 2019/20, which is less than half the level at which income tax starts to be charged. The usual rate charged is 12%. If this was reduced to 4% for the first £5,000 of earnings and to 8% for the next £5,000 then it is likely that a valuable, if small, contribution to solving this problem would be made, and a clear political message would be delivered.
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If we’re going to keep NI then naturally this seems like a good idea. Is your support for a contributory in the same vein as not wanting to take everyone out of income tax?
I am not sure I am waiting to take everyone out of income tax
In fact, I think that would be a very bad idea
^Not wanting to.
Emminently workable, fair and efficient.
“From each according to his ability, to each according to his needs….”
Radical stuff.
Clearly more joined up thinking is necessary to make sure the tax and benefits systems interact properly at the lower end of the income spectrum. The IFS had an event on the future of benefits in February: https://www.ifs.org.uk/events/1682
Among the great imponderables is that tax is based on the position of an individual over a whole year, but benefits are usually based on the need of a household in a week or a month. The two just don’t join up very well. I’m not convinced that reducing the rate of NICs at the lower end is necessarily the best lever to do that. But I suppose every little helps.
This won’t be popular, but if you are reforming NICs, why not abolish the upper earnings limit for employees, so everyone pays at the full 12% rate. Why should the rate of NICs go down from 12% to 2% when the rate of income tax goes up from 20% to 40%? (Although it looks like basic rate taxpayer are paying tax at 20%, and higher rate taxpayers at 40%, the differential – on earned income, at least – is really only 10% due to NICs: in effect, basic rate taxpayers are paying at 32%, and higher rate taxpayers at 42%.)
That idea may well be in its way…..
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