The end of National Insurance? What next?


E Anglia rail summit

National Insurance has been a fixture on the tax scene for more than 100 years. It was brought in by Lloyd George in 1911, and heralded as the way to fund vital universal benefits, including the state pension.

Now there are rumours that the tax is set to be amalgamated with income tax. But why, and what will come next?

What is it?

National Insurance is a pretty big chunk of all the tax you pay. If you earn more than £149 a week, you'll pay at least 12% of your income in National Insurance. If you earn more than £797 a week, everything you make over this sum will be taxed at 2%. Meanwhile, your employer will also pay National Insurance on your salary - at 13.8%.

National Insurance has always been a fairly misunderstood tax. You have to have paid National Insurance for a specific period of time to qualify for certain benefits - including the state pension. However, paying it was never a way to contribute to your own state pension or benefits - instead you are paying for those who receive these benefits now.

Why axe it?

It means that in practice there's very little difference between the type of National Insurance that individuals pay and income tax.

Because of the existence of this separate class of tax, it has helped governments disguise tax increases. National Insurance was increased 1% in 2003 and another 1% in 2011 without a murmur of dissent, so in the interests of transparency it makes some sense to merge the two.

The Guardian has reported that tomorrow Ben Gummer, MP for Ipswich (pictured), is bringing forward a 10-minute rule bill this week that proposes changing the name to Earnings Tax as the first step towards merging it with income tax.

The newspapers argue that the law is highly unlikely to be changed through this particular bill. However, the Daily Telegraph reported that the idea has piqued the interest of the government, and George Osborne is said to be interested in the possibilities. It would not only increase transparency, but could also reduce administration costs in the process.

The government has already shown some interest in this. It has announced investigations as to whether the operation of the two taxes could be merged, and in 2011 it issued a call for evidence on the greater integration of the two taxes.

Why not?

However, there are some problems with amalgamating the two. A government report in 1986 highlighted that it would apply to all sorts of income, including pensions. It would mean pensioners would be paying to secure an entitlement to benefits they could never receive - such as jobseekers' allowance. It would also substantially increase the amount of tax that pensioners would have to pay on their income.

But perhaps the biggest obstacle would be one of perception, as people would see the amalgamation of the taxes as an increase - and the party that brought it about could be punished for it at election time.

This could explain why a possible amalgamation has been explored in the 1980s, the 1990s and again in 2006 - each time with the conclusion that the benefits would not outweigh the costs.