National Insurance Contributions tax by any other name?

Everybody, with few exceptions pays national insurance contributions (NIC) and the amounts paid are linked to your income, but few people link NIC and income tax in their head.

The old argument, and the original reason they were brought in was the contributions existed to help fund pensions and pay for the national health service. This is clearly no longer the case, and the contributions are included in the total pot available for Government to spend as it sees fit.

NIC for employees is 12% of earnings above the minimum income level of £7,590 for 2012/13, up to an upper level of £42,475 when the amount of NI drops to 2% on any income over this level. In other words, for the average person, who does not pay higher rate tax, the effective “tax” rate on any income he earns above the single persons allowance is 32% – 20% tax and 12% NIC – not 20% as everyone seems to think. For top rate tax payers the rate is 42%. (The tax hurdle is in fact not 20% but 10% as a result of national insurance).

Those who are self-employed have to pay two types of national insurance, a fixed amount of £2.65 a week, just to be self-employed and a further 9% on their profits. This is again something most people who go into self-employment don’t realise – they assume the government will only want 20% of their profits, but this is not the case.

I am not questioning the amount of total tax taken (although that could be done), but the way in which the government tries to hide the true nature of NICs in any announcements it makes. NICs look like taxes, they smell like taxes and the government should have the courage of their convictions and star to describe them as such.

The chancellor did announce plans to look at joining the two, and ignoring the distinction between them, but has concluded this would be too difficult to do. Call me cynical, whilst there might be difficulties, there would not be insurmountable, but the Chancellor would have lost a very potent weapon in his armoury to increase the total tax take without raising the income tax rate – as Gordon Brown did in the last government. Labour made the pledge of not increasing the lower rate, but they did increase the overall income take by increasing the NIC.

NICs are a tax on income surely as Income Tax is and they should be considered together when looking at the tax burden imposed on all of us.