The government intends to increase social care spending. It is 100% right to do so. It is apparently considering plans to raise national insurance (NI) to make that possible. It is 100% wrong to do so.
Our social care system has been a national disgrace for years, leaving thousands without the care they need and many others facing financial ruin because of the misfortune of needing healthcare in specific areas the NHS does not cover. If anyone thought the status quo was acceptable pre-pandemic, the past 18 months have hopefully changed their minds. Starting to put this right will cost in the region of £10bn a year.
The government is to be applauded for confronting that bill, and for taking seriously the need to raise taxes to pay for it. After all, it has seen the political pain suffered by Gordon Brown and Theresa May for proposing solutions that were branded as death or dementia taxes respectively by their opponents. No one should pretend this is easy.
But the clapping should stop if the government really does intend to raise NI, because it would indefensibly place the burden on young people and low earners. The only thing raising NI has going for it is that it would relatively easily raise serious sums. UN 1% rise in all NI rates would raise around £13bn. But even ex-Treasury civil servants like myself know there’s more to good tax policy than bringing in the cash.
We often think of NI as being just another form of income tax, but it’s a long way from that. The key difference is that some people, and some kinds of income, aren’t covered. Here are four problems that creates.
Primo, younger people bear more than their share because NI is paid only by the working-age population. Once you reach the state pension age (currently 66) you pay nothing. So those already over that age wouldn’t be asked to contribute anything towards the costs of social care reform that they would be the immediate beneficiaries of. This includes at least 68 MPs who are aged 66 or over. E, unsurprisingly, the typical member of the House of Lords would also be exempt.
Second, lower earners pay more than they would from an income tax rise. Someone earning under £10,000 would be affected by a NI rise, while only those earning more than £12,570 pay income tax.
Third, the focus on lower and younger earners is made worse by the fact that all other sources of income apart from earnings are exempt. The generally wealthier minority who get their income from renting out property, owning a business or being rich enough to have lots of investments won’t contribute a penny. And pension income is also not covered. The overall result is that an NI rise is significantly less progressive than an income tax rise – although it would still be progressive overall.
Here’s a case study. UN 1% NI rise would see a 21-year-old earning £50,000 pay more (£400) than one earning £20,000 (£100). But both would be paying more than a 66-year-old with an income of £50,000 – who would pay precisely nothing.
Lastly, if the government’s plan is to raise the NI paid by employers as well as employees it would deepen one of the big problems facing our tax system: the ludicrous tax gap between employees and the self-employed. In fact the tax rise on employees would ultimately be double that for the self-employed, because employer NI isn’t paid if a worker is self-employed but for employees it eventually gets passed on in the form of lower wages.
And remember, the self-employed already get a £5.9bn-a-year NI tax break. This problem also creates a strong incentive for firms to opt for bogus self-employment and for individuals to set up firms so they can take their pay as dividends or capital gains. This has been driving up the share of workers not covered by employment law in recent decades and costing the Treasury billions in tax avoidance. The chancellor, Rishi Sunak, promised only l'anno scorso to address this problem, not to make it worse.
These four reasons should be an open and shut case against an NI rise. An increase in income tax would be fairer between rich and poor, young and old. The fact that NI is still being considered reflects one view of the politics. An NI rise is less visible to most workers (if employers’ rates rise) and the public has historically seen the connection between NI and funding the health service.
But the government is taking a gamble if that static view of the politics dominates its thinking. This tax rise will be by far the most controversial one it puts in place this parliament. It will give Labour, now desperate for some policy, an easy route to demonstrate that the funds could have been raised more fairly with higher income households paying more of their fair share. No 10 is kidding itself if it thinks it’ll be an easy ride. In contrast a straight income tax rise, with a slightly higher increase for the very top, would be something the opposition would have to support – taking a lot of the political pain out of doing the right thing.
Our social care system is a national disgrace, so the government is right to recognise it needs more funding and to say that means higher taxes. But raising national insurance is a terrible way to go about it. It asks younger and lower paid workers to contribute more than older and wealthier people, compared to a fairer rise in income tax. Why we would do that, having just lived through a pandemic that has increased wealth but hit young low earners hard, is a question to which no one has a good answer.