Election manifesto pledges are at best promises, not necessarily meant to be kept, and yet readily broken when the situation demands. The prevailing unsatisfactory circumstances thus provide the rationale for British Prime Minister Boris Johnson’s abandonment of a 2019 manifesto pledge, dispensing with a “promise not to raise the rates of income tax, National Insurance or VAT”, in favour of a more recent intention to fund “the biggest catch up programme in NHS history”.
The Covid-19 pandemic has created long waiting times for operations and other specialised procedures in the NHS and has also focused minds once again on long-standing deficiencies in the provision and funding of adult social care. All of this has forced the government to step in and act to set things right. A fresh injection of money into the NHS and the social care sector, through a new Health and Social Care Levy to be funded by increasing government tax revenue, has become the preferred option to take things forward.
Mr Johnson’s most recent political gamble entails increasing the takings from National Insurance (NI), both by raising contribution rates as well as by further extending the tax base to include, from April 2023, 1.3 million pensioners who continue to work beyond the State Pension Age of 66. This option appears more acceptable to wider sections of the public than any potential increases in Income Tax. NI is seen as a worthier cause, being considered ring-fenced, although debatably so, to pay for the NHS, while also entitling contributors to certain ‘contributory benefits’, including the state pension and various social security benefits (jobseeker’s allowances, employment and support allowances, maternity allowance). On the other hand, income tax hikes are seen as more threatening and also believed more likely to disappear down a “bottomless pit” of ever-increasing government expenditure. The proposed increase of 1.25 pence in the pound, or 1.25 percentage points, in Class 1 employees’ contributions from April 2022, equates to a rise in NI contribution rates to 12.25 per cent for employees and 10.25 per cent for the self-employed.
NI is the second-largest source of government tax revenue after Income Tax, accounting for almost a fifth of total receipts. National Insurance Contributions (NICs) are extracted at source, using the PAYE system, from each employment, during each individual pay period (a week or a month). Both employee and employer pay NICs, unlike Income Tax, which is paid solely by employees. Income Tax and NI form part of what might be considered a dual-taxation system on earned income. This earned income is taxed at a higher rate than the unearned income from dividends, interest, and rents. Income tax is calculated annually for person using a variable tax code and based on all earnings, while NI is determined by a person’s unique National Insurance Number (NINo) and calculated weekly, separately for each source of income. NI adds to the complexity and administrative costs of the taxation system, leading to calls for reform, and even abolition and replacement with a single income tax.
The NHS is mainly funded by general taxation, to the tune of 80 per cent, with an additional 15 per cent of funding via the National Insurance Fund. National Insurance increases have been resorted to before, such as by Chancellor Gordon Brown, in his Budget of April 2002, to fund a previous bout of public spending, at a rate faster than the growth of the economy.
National Insurance was first envisioned in Lloyd George’s Peoples’ Budget of 1908 and implemented following the National Insurance Act 1911. To begin with, NI involved flat-rate weekly contributions by employees and their employers, and provided contributory benefits during periods of illness and unemployment. Substantial expansion of the scope of NI came about in 1948, mainly as a result of the Beveridge Report on ‘Social Insurance and Allied Services’ of 1942. An earnings-based system replaced flat rates payments from 1975 onwards, since when NI has been collected by HMRC through the PAYE (pay as you earn) system, alongside Income Tax.
NI contributions can be considered a regressive tax, imposing a disproportionate burden on lower-income and younger employees while having a smaller impact on high earners who can most afford to pay. The lower earnings limit (£184 a week) is lower than for income tax, and the rate of contribution drops to 2 per cent once the upper earnings limit (£967 per week) is reached.
The die has been cast, and there can be no turning back. Some dissenters are unhappy that the NHS will be prioritised for funds over social care, while others bemoan a lack of clarity about the proposed social care action plan. Earned incomes are being taxed yet again, while the tax potential from untapped sources of unearned incomes (apart from a proposed 1. 25 per cent on dividends from stocks and shares) remains largely untouched. Whatever may happen, the reputation of the Conservative Party as the party of low taxation has been irretrievably damaged, just as its commitments to the principles of progressive taxation remain to be confirmed.
Ashis Banerjee