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Wednesday, October 20, 2021

National insurance: a UK tax that is complex and vulnerable to political interference

The UK government has announced plans to increase the national insurance rate by 1.25% to fund increased spending on health and social care. The move has divided opinion – and has also drawn attention to a tax that is the largest in terms of Treasury revenue (second only to income tax), but perhaps the least understood one.

Introduced in 1911, national insurance was expanded to its current position as a pillar of Britain’s tax system in 1948 as part of the creation of the welfare state. Then, as it is now, it was a tax on working income with contributions made by both employees and employers (the self-employed also contribute at a different rate to employees).

Earlier, employees used to get tickets in return for their contribution, which entitle them to benefits if needed. Originally there was one ticket for health and pension benefits, and the other for unemployment benefits, but from 1948 a ticket covered everything.

Until 1975, contributions were at a uniform rate before being based on a percentage of earnings. The initial standard rate for employees was 6.5% but this has increased over time to the current rate of 12%, and will increase to 13.25% in April 2022. The second major change in 1975 was the introduction of a system that saw contributions. Deductions are made through the Pay As You Earn (PAYE) scheme, as it is today.

The relationship between contributions and benefits has become less clear as a result of the subsequent overhaul of the welfare system. So while National Insurance contributions still count towards an individual’s state pension, for example, other benefits (including universal credit and housing benefits) can still be claimed by those not contributing.

Furthermore, in contrast to the relative simplicity of income tax rates, the intricacies of the current national insurance system are less established and understood. In 2011, then-Shadow Chancellor Alan Johnson was also unsure what the rate was during a TV interview.

This lack of clarity can have a significant impact on the public’s perception of NI as part of their tax payments. This may seem unnecessarily complicated and completely incompatible with the income tax system, as shown in this graph.

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Combined Marginal Rates.
Institute of Financial Studies,

In a progressive tax system, it is expected that the marginal rate of deductions paid will gradually increase as income increases. Yet in reality, marginal increase and decrease occurs at seemingly arbitrary thresholds.

The complexity of the system severely affects its transparency and people’s understanding of what they are paying for and why. This arguably allows politicians to secretly take advantage of this situation with tax changes. This happened in 2001 when a Labor government promised not to raise income taxes, but later raised the national insurance rate from 10% to 11% in its post-election budget (again to fund the NHS).

A further increase from the current rate of 12% was announced by Labor in early 2010. Despite criticism of the proposal from the Conservatives at the time, he did not cancel the escalation when he took power later that year (along with the Liberal Democrats).

rates of change

The combination of the weak link between contributions and profits, as well as the complexity of the national insurance system, means that some analysts believe it would be too easy to combine income tax and national insurance into one direct tax.

The main argument is that it would simplify the tax system, make it easier for the public to understand, and make it more difficult to hide changes in rates.

Read more: What is national insurance – and where does it go

But the main impediment to making this change will be how employers’ contributions will be collected. Introducing an employer tax may be an option, but it will no doubt be controversial.

Other hurdles include working out how a new system might be implemented across the UK, as there are currently differences between the four countries. Certainly no government in the recent past has shown the appetite to make such major changes.

But if the controversy over the handing over of National Insurance by this (or in future) government continues, it could give the opposition party a chance to gain favor among voters, promising simplifications and reforms.

This article is republished from – The Conversation – Read the – original article.

World Nation News Deskhttps://www.worldnationnews.com
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