I have published the third in my series of recommendations for the reform of the taxation of higher earners and the wealthy this morning. This forms part of the Taxing Wealth Report 2024.
This latest proposal suggests that national insurance payable by employees and the self-employed should be paid at a single rate on all earnings arising over the lower earnings limit. This would, in effect, abolish the reduction in the tax rate at which this tax is payable for those earnings more than £50,270 a year.
The summary of this report says:
Brief summary
This note suggests that:
- The reduced rate of employee's and self-employed person's national insurance contribution payable by those earning more than £50,270 per annum from either of these sources can no longer be justified when the pretence that national insurance contributions are specific payments made to provide insurance cover for specified risks is no longer tenable and this charge is now a tax like any other within the UK tax system.
- This reduced rate of tax seriously undermines the vertical equity of the UK tax system by being explicitly regressive in nature.
- Along with other undesirable features within the national insurance system, this reduction in rates for those on higher incomes undermines the integrity of the UK tax system and has encouraged tax avoidance and even abuse.
- Revenue of maybe £12.5 billion a year might be raised as a consequence of removing this reduced rate of contribution for higher earners, £11 billion of this sum coming from employees and maybe £1.5 billion from the self-employed. Because the data used to prepare these estimates was out of date these figures may be understated, a risk that is increased by the very cautious basis of estimation used.
Discussion
The anomaly that this recommendation seeks to eliminate is based on a myth dating back to the time that national insurance became a mainstream tax payable by most people in the UK, which happened after 1945.
At that time this contribution was seen as being akin to an insurance premium payable to secure the benefits that the welfare state provided.
Whilst there are still benefits that are linked to a person having made national insurance contributions, the pretence that this tax now represents an insurance premium is a very obvious fiction and should be dropped from the tax and political narratives of this country.
As the note supporting this proposal records:
The behavioural consequence of this proposal is likely to be small, most especially if the opportunity to avoid national charges by the creation of an investment income surcharge, which will also be recommended in this report, is enacted.
Few people will willingly reduce their contractually due incomes to avoid a tax charge despite the claim made by microeconomists that this is likely. The fact that most people have fixed financial commitments and lifestyles that they wish to maintain does in fact suggest that the opposite might well be the case. It is, therefore assumed that an overall neutral reaction to this change is likely.
The estimated revenues that this change might generate are based on out-of-date (but still the most up-to-date available) information that HM Revenue & Customs has published. It has been very cautiously extrapolated. Despite that, it is estimated that approximately £12.5 billion of revenue might be raised as a result of this obviously required change to the UK tax system.
The three recommendations now made as part of the Taxing Wealth Report 2024 would, taking this latest proposal into account, raise total additional tax revenues of approximately £35.7 billion per annum.
The note on which this blog post is based is available here.
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I agree with all of the premises/rationales of these suggestions.
I wondered how they were being received more widely?
The obvious accusations will be that it hurts the poor (the same crocodile tears we see used in the clean air debate around ULEZ) and that we need the un-taken tax and NI to support the economy.
The thing is, nothing adds up anymore does it?
We have offshore wind farms and affordable housing that cannot be built because of interest rate hikes and an out of control BoE plus an economic monkey cage in politics.
It’s almost the perfect storm of incompetence.
This proposal has no impact at all on almost 90% of Uk earners
Wondering why you are going down the route of extending NI and introducing an investment income tax (as you already hint at). Why not abolish employee NI and load it into income tax?
Indeed, why not abolish employer NI, raise wages and income tax rates?
Are there avoidance/evasion issues if we “overload” income tax?
Are there political considerations?
I entirely agree with the thrust of your argument but in my own mind assumed abolition of NI was simplest.
The big problems with abolishing NI are:
– It’s very complicated, and I am looking for pragmatic changes
– It does still link to benefits
– Age issues arise with virtually two income tax systems being required as a result
– Multiple taxes work better
– Internationally our income tax would be way out of line
So, I simplify instead.
Fair enough.
Most people do not understand what NI is and they certainly do not understand the difference between employee and employer NI. It would be a MASSIVE tax simplification to simply get rid of all types of NI and adjust tax rates and all salaries upwards accordingly.
You have already said NI is only a tax and I agree with you, so the argument that “it is complicated” and “it is linked to benefits” does not justify retaining it in my view. HMRC could easily substitute taxes paid for NI contributions when assessing how much benefit to pay out.
Eliminating NI and putting it all onto income tax would have the additional benefit of taxing income from those who are 60+ at the full rates (compared to the existing system where NI is not payable after retirement age) and taxing investment income at the same rates too.
Additionally, the current quirk where the personal allowance is withdrawn above £100K should be eliminated and a correspondingly higher tax rate introduced starting at £100K instead. This would avoid the current marginal rate of tax of 60% which is not obvious to those that are paying it.
I will deal with tax rates later.
And i am sorry – but unless you can show me how we can easily get rid of NI – fully worked through please – I will continue to believe it is not easy.
This is a simple change and is perhaps just the logical conclusion of the process from the extension of employer contributions to earnings above the upper level earnings limit in 1984, and the 1% and then 2% rate payable by employees on earnings above the upper earnings limit from 2003.
It is also in effect a 10% increase in tax rates on earned income subject to the higher and additional rate taxpayers.
So the effective income tax rates (ignoring all sorts of complexities such as student loans or tax credits) would be zero to the personal allowance, then 32% (basic rate plus NICs) to the higher rate threefold/upper earnings limit, then 52% (higher rate plus NICs) then 57% (additional rate plus NICs). (Rather than zero, 32, 42 and 47 as they are today – so still progressive when taken together, just less progressive than most people realise).
By the way, median earnings in London are around £42k, so we are approaching a point where most earners in London pay at the higher rate (albeit many people pay no income tax at all). Nationally median earnings is around £33k.
This change would mean your proposal to limit relief on pension contributions would raise several billions more than I had expected.
I may be suggesting changes to income tax rates….
You are right re pension proposals but my estimates are deliberately being made in isolation
All of this is an exercise in self gratification..aside from this blog you will receive no meaningful traction..you never do!!
It was in the Guardian yesterday, and The National.
Interest is being shown by politicians.
And as for traction, you are cleartly unable to appraise evidence.
Why waste you time making stupid comments?
Presumably people like Edward Hearn make stupid comments in order to demonstrate that they really are stupid?
I wish I knew
I think they believe they are clever
They really are not
Looks like another way to get people who work hard to get higher salaries will have to to pay more, yet again. An individual on 60k is not taking home significantly more than when they earned 50k. Your proposal will simply mean people put more in to private pensions and thus income is further diminished from a tax perspective.
Most of the demographic you are referring to here has private medical, private pensions etc so reliance on the state is little. Thus the justification to tax them more to get more income for an inefficient and failed state is not very strong. There is a systemic problem here, how some are not paying any tax and the rest are having to keep the leaky boat afloat.
Millions of business’s in the UK are more and more Tax efficient and individuals are unable to do the same. Its about time everyone is on the same playing field.
I guess I need to post comments as stuopid as this to show what we are up against.
I am intrigued that you think cutting the pension subsidy will increase contrbutuons. Try working through the logic of that….
And where is this inefficient and failed state – unless you are taking about the consequence of the neoiloberal policies you no doubt espouse?
Basically what yoiu are saying is f**k everyone but you. Would you agree?
‘None’
Your idea that people on higher wages live in some form of .’meritocracy’ is just so quaint and simply not true.
As is your assertion that these people are using services that have no impact on the state. I’ll think you’ll find that many of those in private healthcare practice in the UK started out on being trained and gaining experience in the publicly funded NHS and that private healthcare has only expanded as NHS options have been deliberately contracted.
A lot of ‘public schools’ started out as truly public institutions but were then taken over by private concerns and are now tax exempt as if they are doing to D of E a favour!!
To me you’re typical of the type of neo-liberal we see here. You just cannot cope with complexity can you – everything is clearly delineated to you and do you know why?
Because your discretion on such matters is simply driven and executed by your prejudices.
Private healthcare in the UK relies on the NHS. Very few private hospitals in the UK have the facilities to deal with emergencies or an ICU. If you have a private operation or birth that turns out to have complications you will be transferred to an NHS hospital mid treatment. Hundreds of patients every year are transferred in this way and their emergency care is then completed at the expense of the NHS. Very few private hospitals have an A and E department or an emergency ambulance service. Any high earner who needs A and E or is involved in an incident where someone calls 999 will use the NHS service. Finally, almost all the clinical staff in private healthcare have been trained by the NHS. The years of training and experience that has preceded your treatment will be state funded so any high earner using only private healthcare will, nevertheless, be collecting a return on their tax payments in the process.
Thanks
Correct
Yeah you’re right, a 47% tax rate (ignoring the 60%+ marginal tax rate that currently kicks in at £100k) isn’t enough.
This isn’t taxing wealth, it’s taxing work. And for what? So pensioners can keep their triple lock because they paid (a clearly insufficient amount) into the system “all their lives”. So companies like Facebook can make millions in the UK and pay zero tax?
Income tax (including NI because that’s basically all it is) is high enough. Time to think a bit harder.
No, it is not taxing work.
It is removing a bias to wealth in the tax system.
What is your problem with treating people equally when it comes to subsidising savings? Why should the wealthy get so much more?
Please justify your claim. I very much doubt you can.
I am probably jumping the gun here, and you are covering it later, but as someone who has worked for 16 years after the “retirement age” of 60 (you can tell I am a woman!) I have never understood why I no longer pay NI on my earned income.
Given, as you say, “the pretence that national insurance contributions are specific payments made to provide insurance cover for specified risks” I think is it inequitable for me not to pay NI.
It is bizarre. I wiull be in this situatioin nnext year.
I might add it to the list….
Richard
Hear! Hear!
I’ve been arguing for this since the early 2010s – and there’s no way my pension income is massive. We’re the greatest users of the NHS, we have a “time-served” contributory pension…
And ally it to the tax levied on pensions over the basic tax-free allowance. That way the poorest aren’t affected.
Just ran though PolicyEngine- get a slightly higher revenue impact (£13.1bn) in 2023 (https://policyengine.org/uk/policy?focus=policyOutput.netIncome&reform=25473®ion=uk&timePeriod=2023&baseline=1).
Thanks
Ad I noted, I used older data and extrapolated with caution.
I am happy you have a higher estimate, but will stick with wheat I can prove with some confidence based on the HMRC data I can get.
What is your data source?
The data source is based on the Family Resources Survey (used in both other microsimulation models, the IPPR model and UKMOD), adjusted to correct for income under-reporting using the SPI data that powers your statistics (validated against administrative totals, and PolicyEngine’s microsimulation model has been used by some high-profile research outlets).
Some links in case they’re useful:
* Validation: https://policyengine.github.io/policyengine-uk/model/validation.html
* Main tool: https://policyengine.org/uk
* Data enhancement methodology https://policyengine.org/uk/blog/how-machine-learning-tools-make-policyengine-more-accurate
Thanks
I think HMRC data more reliable for this information as it is aggregate and not sample data
But both have their merits
NI is for the purpose of state benefit when needed. The benefits are same for lower and higher earners. Would you pay extra pemium for car insurance just because you earn more? You would pay more to get extra benefits.
NI is like premium. As not every one can’t pay premium fully, it is linked to pay. Higher earners compensate by paying more. Insurance premiums can’t be dynamic. It should be fixed shared proposionally by all earners.
Higher earners pay higher income tax, which is fair.
Your claim is completely and utterly untrue.
You just show your ignorance by making this suggestion.
NI is just a tax now, whatever it might have once been.
And I have made this point in the comments I published. Did you not read them?
I have long considered that all personal taxation should remain proportionate to income.
Your proposal here covers an area I had no understanding of.
There is no logic to suggest that this is an amount which is ‘more’ in the context of proportionality.
Perfectly sound and fair change here, I say.
More if the same.
Why should a higher earner pay less proportionate tax than a low earner?
I am not clear what the objective is here. Continuously attempting to raise taxes will in my view lead to less tax being raised. We need to instead increase productivity and reduce government spending. One way to do this is to have a flat rate of NI. This way people who choose to work part time or be economically inactive would be discouraged from doing it for long periods and making it a lifestyle choice funded by other tax payers.
The Laffer cirve does not work. Tell me why you think it does?
At the same time tell me why the government cannot be highly productive. What could be more productuve for healthcare, education, social care, and much else than a single organisation focussed on task delivery without all the nonsense that marketisation brings in? Please explain.
And if you have not noticed, I have proposed a flat rate of NI – 12%. That is a flat rate. Weren’t you paying attention?
And whilst you are at it, could you tell me what benefit is paid to support a lifestyle choice of not working? If you could point that out to me I would be really grateful as I cannot find one?
Youre detailed answers are awaited.
Mark L
How do you increase productivity while reducing government spending? Do what has been done for the last 13 years? That’s worked well, hasn’t it? Increasing government spending on public services increases productivity. Taxing more equitably just helps prevent inflation.
This is sensible, I think that the over 65s/retirement age people should also pay NI on wages.
But it is certainly not a taxing wealth issue, even so
Now if we were to have some sort of ‘comprehensive’ national insurance system eg better pensions, unemployment and sickness benefit plus some sort of life cover, funeral payment and perhaps mortgage cover then that would be marvellous
apologies if covered elsewhere but any thought given to amending the rate when moving to flat rate so there is some redistribution to those on lower income ? not sure what that would equate too but suspect it could achieve some level of redistribution while simplifying the rates.
Not yet….
Well said Richard.
NI should be a flat rate of around 8-10%.
Employers NICs are a drag on the economy too
Reduce both to 10%.