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April 7th 2014 / BY: Wisteria

Could National Insurance become ‘Earning Tax’?

In a bid to simplify the tax system a backbench bill proposing to change the name of National Insurance to ‘Earning Tax’ was recently discussed in Parliament.

What does NI go towards?

The National Insurance scheme has been in operation for 100 years and sees a 12% deduction from workers’ wages if you earn more than £149 a week and up to £797 a week. If you earn more than £797 a week, you also pay 2 per cent of all your earnings over £797.

Currently, NI goes towards the cost of state pensions, the NHS and benefits. When the system was introduced you could only take out of the system if you have paid in. Over the decade this process has been diluted, erasing the links between the amount someone has paid in and what they take out. With rising populations, increased percentage of elderly people and a strained NHS, the NI contributions are falling short of safeguarding essential services.
The lack of difference in income tax and the proposed earning tax points towards an eventual merge of the two taxes into one.

Is NI outdated?

Even if NI is outdated a merge into income tax may not be the best option either. A merger of the two taxes would pose many problems for pensioners. Having contributed to NI for all of their working life, they would then have to pay a higher combined tax of National Insurance and Income Tax on their pensions. This means that pensioners would effectively be paying into the system twice which would be deeply unfair.

There are also concerns surrounding what to do about tax on returns from savings accounts and rental returns, both of which are charged at the current income tax levels of 20% and 40%. Those living on rents or investment income could also be roped into a system they may not benefit from.

This is not the first time a merger between NI and income tax has been suggested, in 1986 Nigel Lawson attempted a merger but concluded that “the benefits of a combined charge would be unlikely to justify the ensuing upheaval”.

Added confusion?

Ironically, whilst trying to simplify the tax system the backbench bill to rename NI appears to add to confusion.

Among concerns over what could happen to welfare and NHS amid a tax merger, most will be unable to agree with or understand the premise of both an Income Tax and a new Earning Tax. Side by side the prospect seems to do nothing but highlight how much of what we take home each month is taken by the tax man.

What do you think of the proposals to rename NI to ‘Earning Tax’? Will this simplify or confuse an already convoluted system?