Goodbye National Insurance. Hello Earnings Tax

National Insurance, a 100-year old charge on employers and employees, will be renamed “earnings tax”, the Chancellor has signalled.


The change, which will be proposed in legislation to be published on Tuesday, is the first step towards merging income tax with National Insurance.


Ben Gummer MP, a rising star Tory backbencher who has been campaigning on tax transparency, will propose the change in a Commons Bill on Tuesday.


The plans have Treasury backing. A source told The Daily Telegraph that George Osborne, the Chancellor, “is attracted to the idea”.


Mr Gummer said: “I am very pleased the Government is interested in the idea. They have been very receptive to trying to make the tax system more transparent.


“This would be a really good step forward in making what the Government takes from taxpayers clearer and simpler.”

Mr Gummer said he hoped the name change would begin the process of merging National Insurance with Income Tax into one single charge.

He said: “The most important part is changing the name so in the public mind we can begin the two as the same, which they are. This is a first step.”

National Insurance, which is charged on top of income tax, was first introduced in the National Insurance Act by Lloyd George in 1913 as a way for workers and employees to contribute towards certain benefits, such as a state pension.

Unlike income tax, MPs are not allowed to vote on whether it should be levied every year. Instead they are only asked to approve level of the charge.

National Insurance rakes in billions every year for the Treasury. Anyone who is employed and earns between £149 and £797 a week pays 12 per cent of their income in National Insurance. A further 2 per cent is paid on all earnings over that level.

People who are self-employed pay National Insurance at a flat rate or as a percentage of the individual’s annual taxable profits

Sensible idea in my books - if NI had actually been used as a form of insurance - ie what people paid being invested to generate money for when they needed it then I would argue but it has always been treated by the treasury as a tax or even a giant ponzi scheme where todays receipts pay todays bills.

Hmmmm, what happens with self-employed people who have to pay the flat rate NI whether they earn anything or not though? "Earnings tax" wouldn't really be a proper description for them.

So what's Income Tax if it isn't Earnings Tax? Idiots. Don't know why they don't just combine the two.

What happens about contribution-based benefits?

In my small world of non understanding, I had always taken NI to be the money paid for our NHS etc.

gerber wrote:In my small world of non understanding, I had always taken NI to be the money paid for our NHS etc.

Course it is. Like all the Road Tax is used to repair roads. Haven't driven in the UK lately but my kids tell me it's pothole hell.

gerber wrote:In my small world of non understanding, I had always taken NI to be the money paid for our NHS etc.

Me too, and also the state pension and contribution-based benefits.

Yes the money from NI does pay for those things - but it is not supposed to.

It was supposed to be invested and used to generate money and the money it generated then used to pay for those things.

That is why is was called insurance.

sphinx wrote:Yes the money from NI does pay for those things - but it is not supposed to.

It was supposed to be invested and used to generate money and the money it generated then used to pay for those things.

That is why is was called insurance.

NI was not supposed to pay for benefits and pensions?

Raggamuffin wrote:

sphinx wrote:Yes the money from NI does pay for those things - but it is not supposed to.

It was supposed to be invested and used to generate money and the money it generated then used to pay for those things.

That is why is was called insurance.

NI was not supposed to pay for benefits and pensions?

No it was supposed to be invested and the income from the investments used to pay benefits and pensions. That is why it was called insurance in the first place because it was supposed to be used as an insurance.

sphinx wrote:

Raggamuffin wrote:

NI was not supposed to pay for benefits and pensions?

No it was supposed to be invested and the income from the investments used to pay benefits and pensions.  That is why it was called insurance in the first place because it was supposed to be used as an insurance.

As opposed to the NI which people pay today being used to pay the pensions and benefits of today?

Raggamuffin wrote:

sphinx wrote:

No it was supposed to be invested and the income from the investments used to pay benefits and pensions.  That is why it was called insurance in the first place because it was supposed to be used as an insurance.

As opposed to the NI which people pay today being used to pay the pensions and benefits of today?

Exactly. When people pay private pensions the money they contribute is put into a pot which invests on the stock exchange and the money that is generated from that through dividends is also paid into the pot then when the person retires the amount is the total of the investments, and dividends which should have shown higher growth than an ordinary savings account.

When NI was introduced the idea was the government invested some and used some to pay bills until such time as the returns from the investments covered all bills - instead they used more and more to pay bills until the whole of NI income was being used on bills and none being invested - and it has stayed that way for a long time. If the amount a person paid in NI had been paid into a private pension their pension would be much higher than that paid by the government. It is not quite that simple because of benefits and NHS but even so previous governments should have been investing a portion of NI - and if they had pensions, benefits, and NHS would be in less difficulty now.

National Insurance was initially a contribution based scheme - if you never paid in you'd get bugger all.

As more and more people never bothered working and more and more foreigners entered the country that got a little difficult for the liberal do-gooders to say "no, you're not on the list, p1ss off".

sphinx wrote:

Raggamuffin wrote:

As opposed to the NI which people pay today being used to pay the pensions and benefits of today?

Exactly.  When people pay private pensions the money they contribute is put into a pot which invests on the stock exchange and the money that is generated from that through dividends is also paid into the pot then when the person retires the amount is the total of the investments, and dividends which should have shown higher growth than an ordinary savings account.

When NI was introduced the idea was the government invested some and used some to pay bills until such time as the returns from the investments covered all bills - instead they used more and more to pay bills  until the whole of NI income was being used on bills and none being invested - and it has stayed that way for a long time.  If the amount a person paid in NI had been paid into a private pension their pension would be much higher than that paid by the government.  It is not quite that simple because of benefits and NHS but even so previous governments should have been investing a portion of NI - and if they had pensions, benefits, and NHS would be in less difficulty now.

I see what you mean. However, the state pension is a fixed rate rather than being based on what people have paid in, so it's a bit different. Those who paid only a little bit of NI might have got less pension if it was invested in the way you describe, and those who paid in loads would get a much bigger state pension. Whatever happened to SERPS by the way?

The other thing is that the Government has moved the goalposts re retirement age, whereas that doesn't happen with private pensions.

I do think it's stupid calling it insurance because usually if you don't pay insurance premiums you don't benefit when things go wrong. People who haven't paid any NI can get the same amount of JSA as those who have paid in, so it's not really insurance.

Raggamuffin wrote:

sphinx wrote:

Exactly.  When people pay private pensions the money they contribute is put into a pot which invests on the stock exchange and the money that is generated from that through dividends is also paid into the pot then when the person retires the amount is the total of the investments, and dividends which should have shown higher growth than an ordinary savings account.

When NI was introduced the idea was the government invested some and used some to pay bills until such time as the returns from the investments covered all bills - instead they used more and more to pay bills  until the whole of NI income was being used on bills and none being invested - and it has stayed that way for a long time.  If the amount a person paid in NI had been paid into a private pension their pension would be much higher than that paid by the government.  It is not quite that simple because of benefits and NHS but even so previous governments should have been investing a portion of NI - and if they had pensions, benefits, and NHS would be in less difficulty now.

I see what you mean. However, the state pension is a fixed rate rather than being based on what people have paid in, so it's a bit different. Those who paid only a little bit of NI might have got less pension if it was invested in the way you describe, and those who paid in loads would get a much bigger state pension. Whatever happened to SERPS by the way?

The other thing is that the Government has moved the goalposts re retirement age, whereas that doesn't happen with private pensions.

I do think it's stupid calling it insurance because usually if you don't pay insurance premiums you don't benefit when things go wrong. People who haven't paid any NI can get the same amount of JSA as those who have paid in, so it's not really insurance.

It was supposed to have worked like a sort of combination pot - in private pensions the guy who pays in 500 a month gets a smaller pension than then one who pays in 1000 a month - NI was supposed to see them both get the same by setting number of payments as the deciding factor (there is also a maximum payment).

The reason the goal posts had to move was because the money was not invested - if peoples NI or even some of the NI had been invested 40 years ago there would be less pressure now to increase pension age.

It is stupid calling it insurance - that is why I support the name change.

sphinx wrote:

Raggamuffin wrote:

I see what you mean. However, the state pension is a fixed rate rather than being based on what people have paid in, so it's a bit different. Those who paid only a little bit of NI might have got less pension if it was invested in the way you describe, and those who paid in loads would get a much bigger state pension. Whatever happened to SERPS by the way?

The other thing is that the Government has moved the goalposts re retirement age, whereas that doesn't happen with private pensions.

I do think it's stupid calling it insurance because usually if you don't pay insurance premiums you don't benefit when things go wrong. People who haven't paid any NI can get the same amount of JSA as those who have paid in, so it's not really insurance.

It was supposed to have worked like a sort of combination pot - in private pensions the guy who pays in 500 a month gets a smaller pension than then one who pays in 1000 a month - NI was supposed to see them both get the same by setting number of payments as the deciding factor (there is also a maximum payment).

The reason the goal posts had to move was because the money was not invested - if peoples NI or even some of the NI had been invested 40 years ago there would be less pressure now to increase pension age.

It is stupid calling it insurance - that is why I support the name change.

Yes, I agree. Calling it earnings tax is also stupid though, and they need to differentiate between that and income tax because of the contribution-based benefits things.

Raggamuffin wrote:

sphinx wrote:

It was supposed to have worked like a sort of combination pot - in private pensions the guy who pays in 500 a month gets a smaller pension than then one who pays in 1000 a month - NI was supposed to see them both get the same by setting number of payments as the deciding factor (there is also a maximum payment).

The reason the goal posts had to move was because the money was not invested - if peoples NI or even some of the NI had been invested 40 years ago there would be less pressure now to increase pension age.

It is stupid calling it insurance - that is why I support the name change.

Yes, I agree. Calling it earnings tax is also stupid though, and they need to differentiate between that and income tax because of the contribution-based benefits things.

Not really - contributions was always about the number of payments made not how much (remember a woman not working because of childcare can get contributions "paid" by the government to recognize her important non paid role) and that can be worked out just as easily from number of times tax paid.

The best solution all round is for the 2 (income tax and NI) to be merged into one payment because it will cost much less to collect resulting in savings.

UKIP have had this policy for a number of years - and now it seems the other parties are catching on as well.

sphinx wrote:

Raggamuffin wrote:

Yes, I agree. Calling it earnings tax is also stupid though, and they need to differentiate between that and income tax because of the contribution-based benefits things.

Not really - contributions was always about the number of payments made not how much (remember a woman not working because of childcare can get contributions "paid" by the government to recognize her important non paid role) and that can be worked out just as easily from number of times tax paid.

Yes, so how would it work if they merge tax and NI then? Some people earn money but not enough to pay any tax or to be credited with any NI payments. What about self-employed people who don't earn enough to pay tax and no longer have to pay Class 2 NI?

SERPS was mentions, it was a surprise to me when I was told what my pension would be.apart from my pension I was granted £5.78 a week from payments I had paid into SERPS.

Raggamuffin wrote:

sphinx wrote:

Not really - contributions was always about the number of payments made not how much (remember a woman not working because of childcare can get contributions "paid" by the government to recognize her important non paid role) and that can be worked out just as easily from number of times tax paid.

Yes, so how would it work if they merge tax and NI then? Some people earn money but not enough to pay any tax or to be credited with any NI payments. What about self-employed people who don't earn enough to pay tax and no longer have to pay Class 2 NI?

People have to declare their income even if it is not sufficient to pay tax/NI on - to change to a single tax system would simply changing how much is paid on what income. At the moment you have a whole system set up to take around 10% of earnings from a very low level - that NI, then another separate system that takes 21% from £9000 odd then 45% from £40000 odd etc. It would be considerably cheaper to have a system that takes 10% at say £1000, then 30% at £10000, then maybe 55% at £40,000 if the higher tax band is kept (I prefer a flat tax but that is another story)

One of the problems is it will appear that taxation is increasing because at the moment people think of tax at 20% and dont consider that NI is at 10% so they are in effect paying 30%. Part of this is because of the tax free allowance that will see most people loosing around 25% of their gross income to both. So if they are both merged people will start shouting about taxation going up to 30% even though that is what they already pay only broken down into separate amounts.

sphinx wrote:

Raggamuffin wrote:

Yes, so how would it work if they merge tax and NI then? Some people earn money but not enough to pay any tax or to be credited with any NI payments. What about self-employed people who don't earn enough to pay tax and no longer have to pay Class 2 NI?

People have to declare their income even if it is not sufficient to pay tax/NI on - to change to a single tax system would simply changing how much is paid on what income.  At the moment you have a whole system set up to take around 10% of earnings from a very low level - that NI, then another separate system that takes 21% from £9000 odd then 45% from £40000 odd etc.  It would be considerably cheaper to have a system that takes 10% at say £1000, then 30% at £10000, then maybe 55% at £40,000 if the higher tax band is kept (I prefer a flat tax but that is another story)

One of the problems is it will appear that taxation is increasing because at the moment people think of tax at 20% and dont consider that NI is at 10% so they are in effect paying 30%.  Part of this is because of the tax free allowance that will see most people loosing around 25% of their gross income to both.  So if they are both merged people will start shouting about taxation going up to 30% even though that is what they already pay only broken down into separate amounts.

So you think that low earners should pay some tax? At the moment a single person pays tax on earnings over £9440, and they pay NI on earnings over £149 per week (£7750 per year). If they earn between £109 and £149 per week they are credited with NI contributions even though they don't pay anything. What happens to the credits in this new system?

Raggamuffin wrote:

sphinx wrote:

People have to declare their income even if it is not sufficient to pay tax/NI on - to change to a single tax system would simply changing how much is paid on what income.  At the moment you have a whole system set up to take around 10% of earnings from a very low level - that NI, then another separate system that takes 21% from £9000 odd then 45% from £40000 odd etc.  It would be considerably cheaper to have a system that takes 10% at say £1000, then 30% at £10000, then maybe 55% at £40,000 if the higher tax band is kept (I prefer a flat tax but that is another story)

One of the problems is it will appear that taxation is increasing because at the moment people think of tax at 20% and dont consider that NI is at 10% so they are in effect paying 30%.  Part of this is because of the tax free allowance that will see most people loosing around 25% of their gross income to both.  So if they are both merged people will start shouting about taxation going up to 30% even though that is what they already pay only broken down into separate amounts.

So you think that low earners should pay some tax? At the moment a single person pays tax on earnings over £9440, and they pay NI on earnings over £149 per week (£7750 per year). If they earn between £109 and £149 per week they are credited with NI contributions even though they don't pay anything. What happens to the credits in this new system?

I did not know the figures but there is no reason for the credit system to change - like I said income has to be declared even if nothing is paid on it - the person who earns £3000 a year still has to declare that to the inland revenue.

So that would work as up to £5700 declared nothing, up to £7700 payment is credited, up to £10000 10% is paid, after that 30% is paid.

Anything done in the first system (NI) can be done in the second (tax) if they become a single system - and a single system is cheaper to run than 2 systems.

sphinx wrote:

Raggamuffin wrote:

So you think that low earners should pay some tax? At the moment a single person pays tax on earnings over £9440, and they pay NI on earnings over £149 per week (£7750 per year). If they earn between £109 and £149 per week they are credited with NI contributions even though they don't pay anything. What happens to the credits in this new system?

I did not know the figures but there is no reason for the credit system to change - like I said income has to be declared even if nothing is paid on it - the person who earns £3000 a year still has to declare that to the inland revenue.  

So that would work as up to £5700 declared nothing, up to £7700 payment is credited, up to £10000 10% is paid, after that 30% is paid.

Anything done in the first system (NI) can be done in the second (tax) if they become a single system - and a single system is cheaper to run than 2 systems.

Sounds OK.

They would have to sort something for self-employed people. At the moment they are discriminated against because they have to pay NI whether they earn or not, unless they opt out because of low earnings, and if they don't pay they don't get credits. Class 2 payments also do not entitle them to contribution-based JSA.

I think that everyone who earns money should pay some tax, even if it's a very small amount. That gives them a legitimate say on how their money should be spent.

Raggamuffin wrote:I think that everyone who earns money should pay some tax, even if it's a very small amount. That gives them a legitimate say on how their money should be spent.

And those who don't earn money should not be allowed on the electoral register, in my opinion!

BigAndy9 wrote:

Raggamuffin wrote:I think that everyone who earns money should pay some tax, even if it's a very small amount. That gives them a legitimate say on how their money should be spent.

And those who don't earn money should not be allowed on the electoral register, in my opinion!

Well that would be ridiculous given there are many who can't get out of bed its hardly their fault is it. If its won't work that's another matter I won't defend them but can't work that's out of order.

Back on topic I would agree that transparency is a good thing politicians sink or swim on an honest clear message rather than massaging the headline figures. I think right and left could agree on that.

Let there be one earnings tax. Then none can hide behind it. Labour want high taxes then say it as it is.