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Paul Lewis: Scrap National Insurance contributions

Radio 4 presenter Paul Lewis Is it time to scrap the National Insurance fund? Despite its name, it is not a fund and it is not insurance, though a fiction is carefully woven around it to make it appear as if it is both.

Its very name is misleading. The word “fund” makes people think of a pot of money saved up for the future. And the contribution rules, which link paying enough NICs to getting a full state pension, confuse the public into thinking that, somehow, the money in the fund is theirs – saved up to pay for their state pension. But the fund does not exist except outside a set of accounts.

Myth 1: The fund is used to pay benefits. No it is not. The money used to pay benefits comes from the consolidated fund: the money the Government owns, if you like. That is where the fund sits. The fund does not even get all the NICs paid. A big chunk goes straight to the NHS. In 2017/18 that will be £24bn; about 19 per cent of receipts. The balance – a shade under £100bn – goes into the fund, which also gets a notional sum of £2.6bn interest added on as interest from the Treasury on its balance.

The main benefit set against the fund is the state pension, which takes 92.4 per cent of the money paid out. Another 4.4 per cent goes to pay contributory Employment and Support Allowance (what used to be called invalidity benefit) for those too ill to work.

The contributory version only lasts 12 months. Another 0.5 per cent pays for bereavement benefits, 0.4 per cent for maternity allowance (for those who cannot get statutory maternity pay) and 0.3 per cent goes on contributory Jobseeker’s Allowance (paid only for the first six months out of work). Another 0.3 per cent covers redundancy money which employers fail to pay. Each of those is less than the cost of administration, which is put at 0.8 per cent – £841m in 2017/18.

Paradox time in new state pension land

The money that comes in from NICs and goes out to pay those benefits should roughly match. If it does not, then the Treasury steps in and uses ordinary taxation to top it up. In 2015/16 it handed over £9.6bn – about 11 per cent of the year’s receipts from NICs. That was in addition to a £4.6bn top-up the year before.

In 2016/17 and up to 2021/22, Government Actuary Martin Clarke says the fund will be more than enough to meet its commitments. That is largely because extra income was generated from 2016 by the big rise in NICs for six million people who were previously contracted out of part of the state pension.  That rebate was 1.4 per cent of a band of earnings for employees and 3.4 per cent for employers.

Those rebates ended from April 2016 when the new state pension began, and meant an extra fiver a week or so for someone on average pay who had been contracted out into a good work pension scheme (teachers, nurses, police officers and the million or so private sector workers who still pay into a good pension at work).

That fiver will keep the National Insurance fund big enough to meet its obligations up to and including 2021/22. Or so says the Government Actuary. But he has been wrong before. The errors in the past – or more fairly, the mismatch between forecast and reality – were due largely to earnings growth being lower than expected.

In January 2016 he predicted a surplus for 2016/17 of £1.6bn. A year later that had turned into a £2bn deficit. That reversal was largely caused by “lower assumed earnings increases”. That is continuing. In 2016 he assumed that pay would rise 3.2 per cent in 2017/18. This January he had brought that down to 2.4 per cent and, on the latest labour market data, pay including bonuses is now down to 2.1 per cent a year. So the £300m deficit projected for 2017/18 may well get much bigger.

It does not matter. The Treasury is there with its big pot of tax – close on £567bn in 2016/17 – to top up the National Insurance fund as and when required.

Myth 2: I’ve paid for my state pension: No you have not. People believe that, because they have paid their NICs, they have somehow paid for their state pension. That confusion is caused because each year of contributions counts as a “ticket” towards your pension. You need 35 years of tickets to get a full pension and at least 10 years to get any pension at all at the reduced rate of 10/35ths. Fewer than 10 years and you get nothing.

But that system is no more than an assessment of entitlement. Even when 35 years have been paid, most people work another 10 years and still pay NICs right up to state pension age.

The fund deceives people into thinking there are certain benefits that are good – because they have somehow been paid for by the recipients – and other benefits which are bad – because they are a burden on taxpayers. It is all nonsense. Today’s taxpayer pays today’s benefits, whether they go to single mums or state pensioners.

The answer is to scrap NICs, raise income tax rates on earnings to 32 per cent, 42 per cent and 47 per cent, impose an employment tax of 13.8 per cent which all employers would pay on the earnings of their staff, and save the £841m a year spent on administration.

All we need is a clear-minded, courageous Government with a large majority. Oh…

Paul Lewis is a freelance journalist and presenter of BBC Radio 4’s ‘Money Box’ programmeYou can follow him on Twitter @paullewismoney

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Comments

There are 27 comments at the moment, we would love to hear your opinion too.

  1. Good article, i wish a government would see it that way, the savings could be diverted to the NHS

    • George Morley 9th July 2017 at 4:20 am

      no Mike Hunt, the savings should and would pay the frozen pensioners their indexed pension denied by successive governments for decades as steve webb would have said.
      ( apologies for no capitals – key broken )

  2. James Gilbert 3rd July 2017 at 3:23 pm

    This article reads as an apologia for the misunderstandings in the previous “tax burden” piece.

    Anyway, the fund does indeed pay benefits, as the article implies in places. If one hasn’t paid the contributions one can’t get the benefits. That’s the point about it “paying benefits”, not the behind-the-scenes accounting.

    But this “contributory principle” – which remains popular – is vitiated by (1) the fact that similar benefits will often be paid if one hasn’t met the contribution requirements, something that the left has consistently promoted, and (2) the means-testing of contributory benefits that has crept in over time.

    As the BBC’s personal finance consumer champion you would rightly rail against any pensions injustice committed by the private sector, and yet the effect of your proposal is that there is a mass nullification of all accrued state pensions rights. Or would you propose another system to somehow guarantee those accrued rights, and what about future rights? Would that be NI, in which case your £841m seems just a tad optimistic.

    While we’re at it, can we scrap the licence fee, which is of course just another “tax”?

  3. Colin Caulfield 3rd July 2017 at 3:27 pm

    Interesting – so, you’d like pensioners to start paying significantly more tax in retirement via higher income tax rates when they don’t pay NI ??

    Hardly a vote winner for a ‘weak & wobbly’ Government !

  4. An interesting article from Paul for a change, that has some merit. You could go further and perhaps increase VAT % so as to catch those that work in the black economy, and allow no VAT reclaims as we do now.

    Not sure it would raise enough but worth running the figures!

  5. Dominic Thomas 3rd July 2017 at 3:34 pm

    I’ve been thinking the same thing for a while. Pension and tax simplification is possible if Government had some imagination and backbone. I agree with Paul’s sentiment

  6. Finian Manson 3rd July 2017 at 3:48 pm

    “All we need is a clear-minded, courageous Government with a large majority. Oh…”

    And therein lies the problem, coupled with an inherent dislike of clarity, transparency and simplicity.

    If people realised how much they actually pay in taxes Governments would no longer be able to indulge in vanity and feel-good projects at our expense.

  7. I am delighted to agree with Paul Lewis. Indeed I have said much the same for years.

    While they are at it they should scrap this woebegone AE and ensure that they start a sort of Sovereign Wealth fund (which NI was supposed to be in the first place) and use it to fund decent pensions. If individuals or firms then want to contribute to private or company schemes then good for them, but this will be a way of ensuring that the reluctant are catered for. Sure tax may well have to rise, but what odds – AE is a tax anyway and a costly and unwelcome impost for firms who (as I never tire of saying) are not benefit agencies.

  8. Philip Milton 3rd July 2017 at 4:02 pm

    Which Government would like to be accused of increasing Income Tax by say 15%…

    But maybe as NHS is involved, the age restraint for contributions should go so that older wealthier individuals should continue paying…as well as being charged against all income and not just earnings… but again, even Labour working class would say that that hits them even if it doesn’t. It’s not going to happen is it, unless it does not need to be in the manifesto!

  9. James Gilbert 3rd July 2017 at 4:06 pm

    @Finian – that is very true. It certainly is not in the interests of those who favour more, or even the current level, of redistribution to have greater transparency

  10. This is when Sir Humphrey would say, Very courageous minister”

    NI and income tax are incompatible in the way they are set up. NI works on a pay period basis, income tax on an annual basis. There is a maximum amount on which NI at full rate is calculated, no such thing with income tax.With NI each employment is treated separately, all income is added together for income tax. You don’t get relief on NI for pensions contributions

    It would also be politically difficult as it would make clear that earnings are much more heavily taxed than income from investments. Odd as I am old enough to remember when “unearned income” was more heavily taxed.

    Put it into the “too difficult to sort out file”

  11. Hear, hear Paul.

    But I just read the government’s own verb declention for “not transparent”.

    I am almost clear

    You are a tiny bit opaque

    He is a obfuscating bar steward.

    Whilst you and the FCA and all and sundry can keep badgering the financial services industry to be less obfuscating, there is no benefit to any government doing so, large majority or otherwise.

  12. Robert Milligan 3rd July 2017 at 5:10 pm

    We need to stop the NI scandal, as such everyone is being conned,, what we need is a simple tax rate of 25% for everyone, decide at what rate it starts ie the personal allowance, then Tax everyone with no max all earnings earned and un-earned, get rid o CGT and the spend the time and money getting everyone to PAY their TAX dues, and stop the on going abuse of Tax Avoidance schemes.

  13. Phil Holbrook 3rd July 2017 at 6:57 pm

    I’ve had a lightbulb moment!!! (“take cover”).

    Continue the license fee of £12/week, but instead of sending the 90 odd % or so to the BBC, who we all (left or right) hate with a passion, send the millions to the NHS to see if we can make it last a few more years before it and its unfunded monstrosity of a pension scheme bankrupts the country and we lose it anyway.

    Spot on Paul. It amazes me how we are so quick to condemn Boiler Room investment scams in the private sector, but we ignore how NI and Unfunded DB Schemes work…

  14. James Gilbert 4th July 2017 at 8:21 am

    @Phil Holbrook – very well said … while we’re at it perhaps it would be a healthy change to have some diversity of opinion instead of BBC programmes that are only ever presented by one person. Why, if we all pay for it, should one person have such a monopoly?

  15. If there’s no National Insurance Fund any more then someone must have nicked the £25bn that was in the investment account at the end of March last year!!

  16. Steven Pearman 4th July 2017 at 12:11 pm

    The comments here scare me. The reality is that the amount of income generated under the large number of different taxes, be it VAT, income tax, FCA charges, banking fines, NI,speeding tickets, CONjestion charge, there is not enough coming in to meet the cost of running the country and to maintain payments on the debt that has been accrued in the good times.

  17. Andy Robertson-Fox 4th July 2017 at 1:40 pm

    Was this not a proposal of Ben Gummer several years ago and whıch was rejected as being too involved, complicated and confusing? Mr Gummer went on to write the Conservative 2017 Election Manifesto…….think that the idea can be shelved, like the Ipswich voters did with Mr. Gummer.

  18. Anybody watched Logan’s Run – the film from the 70’s?

  19. National Insurance Contributions: Scrap Paul Lewis.

  20. Neil MacGillivray 4th July 2017 at 5:05 pm

    Moves to change and simplify NICs is on the way. The Office of Tax Simplification has been working on this since 2010 and have put forward a 7 stage programme which hopes to provide a fully joined up approach to income tax and NICs that will hopefully lead to an alignment of legislation and procedures. They emphasises that the two taxes will not be merged so pensioners should be safe, at least for the time being.

  21. At long last someone willing to agree with the merging of NI and Tax, as NI is only a tax. It makes the tax simpler for everyone and easier for companies to administer. Why not go further and abolish allowances and benefits in kind that are taxed and make it a very transparent system. We should now discuss fair taxation and all that it entails rather than political parties trying to put one over the others to try and prove who is the best party on taxation.

  22. Now Paul that’s proper journalism,
    however the administration of pay the benefit mentioned stil has to be staffed and paid for. So HMRC would increase its staffing to accommodate the now redundant NI staff. So the saving would not be that great. Well done in dispelling the mith of the NI fund.
    We always said it was a bucket of contribution, but the bucket had a bigger hole in the bottom than the one in the top.

  23. What is this? Paul Lewis actually publishes an article that isn’t IFA-bashing?

    It’ll be raining pigs soon.

    On a serious note, Paul, what you fail to realise that NICs are just another layer of taxation that people don’t quite understand and this is good for the government – a “stealth tax” if you like. Imagine if it were lumped together with income tax – a basic rate tax payer paying c. 32% tax? People would be kicking and screaming. But the status quo, they think they only pay 20% in total. Furthermore, NICs are chargeable on the EMPLOYERS too at 13.8%, whereas income tax isn’t. And finally, NICs aren’t tax relievable on pension contributions, whereas income tax so it were lumped together, the Government would likely have reduced tax take.

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