I was interested to see that George Osborne is thinking about combining tax and national insurance, starting with a review in the Budget. If he does succeed he will rightly go down in history as one of the great reforming chancellors.
My graphic of the UK’s chaotic system of taxation illustrates precisely what is wrong with it – erratic, irrational and unfair. Please understand that these are eth marginal rather than average rates; so that they refer to the effect of earning, say, an extra £1 as you form £10,000 to £10,001 and so on. In that case, if you have children and start to have tax credits taken away, the combined effect of earning an extra pound is to gain just 30p: the Treasury taxes and claws back some 70p. By contrast, if you go from £150,000 to £150,001 you get to keep 48p, with the tax rate of 50% and National Insurance at 2% the Treasury takes 52p in every £1.
The other important thing to remember is that, despite it s name, national insurance is simply another form of income tax, as is, in a way, the withdrawal of child tax credits and child benefit as earnings rise. The pattern resembles some piece of geometric art, or maybe the Manhattan skyline. Less artful is the way those earning say £10,000 a year pay more in taxpayer about 70p in the pound in NI and tax on every extra pound they earn; someone on £150,000 pay sonly 52p. While most of us know whether the top slice of our ANNUAL earnings is taxed at the rate of 20 per cent, 40 per cent or 50 per cent, few know that we pay a further 12 per cent or 2 per cent in national insurance (i.e. from April), or nothing at all, on our WEEKLY income.
It is a product of political cowardice and historical accident. In the Edwardian dawn of the welfare state national insurance contributions were just that linked to entitlement to benefits – hence e the old nickname “the stamp”. That went during the First World War, and it now just goes into one gigantic Treasury pot.
Every Chancellor since David Lloyd George has shied away from reforming the system, for fear of showing us how much the state takes; and they found it easier to stealthily raise NI than tax. Oddly, an ironically, it was the Liberal Democrats who for years argued for a rational combination of tax and NI. Now it seems George Osborne may get the credit for another of their policies.
© Copyright Burnt Orange Accounting
By Kerry Davies
