It has long been my idea, and that of others, that income tax and National Insurance should be merged. There are many reasons for this. First, to have two separate systems for collection of two taxes which are both, in effect, a tax on income but having different start points and different rates imposes an unnecessary burden on the employer and expense to the government. There is also the anomaly that National Insurance is paid only on earned, not unearned income. Why should somebody who has unearned income pay less tax than somebody whose income is earned? This is also the case in relation to those over the state retirement age who do not pay National Insurance. Intergenerational fairness dictates that we should pay the same rate of tax regardless of age or the source of our income.
National Insurance is not a hypothecated tax. It is intended to fund contributory benefits, for example the sate pension, but is insufficient to do so and has to be topped up from general taxation. If that is the case anyway, why not have all benefits paid out of general taxation? National Insurance does not, as many believe, pay for the NHS. National Insurance also hides the true level of income tax. It is also regressive because it doesn’t increase with higher earnings.
The abolition of National Insurance would break the link with contributory benefits in particular the state pension but that could be corrected by paying a fixed state pension and doing away with the hugely complicated Pension Credit which is anyway paid to those who haven’t paid sufficient contributions to enable them to receive a full pension.