Chancellor George Osborne. Photo: Oli Scarff
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Merging income tax and NIC: the Chancellor's calculations

The proposed plan could increase pressure for tax cuts and undermine the contributory principle.

George Osborne is planning to merge income tax and national insurance, according to a report in today’s Times.

The move would increase transparency of the tax system and likely raise pressure for tax cuts, because rolling the two together would help workers to see the scale of how much they contribute to the state.

The total sum paid by workers on the basic rate of income tax, for example, would rise from 20 per cent to 32 per cent. The amount paid by those in the higher bracket would rise from 40 per cent to about 52 per cent, with 2 per cent added to earnings above £42,000.

National insurance is the exchequer’s second-largest income source, raking in £104.5bn in 2012-13. Income tax contributed £152bn.

The political calculations made by No 11 and No 10 (said to be actively considering the proposal) are interesting. The Tories are willing, assuming they make it back into government next year, to risk accusations that they have raised the overall tax rate.

Some allegations would be incorrect and based merely on perception. Incidentally, that risk hints at the work the government would have cut out for itself in creating a public-awareness campaign which explains the amalgamation.

Other accusations would be true, reflecting the closure of quirks and loopholes in the national insurance system if it were merged with income tax. The self-employed, for example, would pay more in the new system because generally speaking they pay less national insurance than employees.

So why would Osborne risk the fallout? The gamble is offset by the Conservatives’ hope that greater transparency of the scale of individuals’ contributions to the state will incline voters towards tax cuts, which are on the cards given that public finances look set improve in the next parliament.

Another hidden benefit is that rolling national insurance contributions and income tax together will undermine the contributory principle, making it easier to slash welfare.

Because national insurance is, of course, a social insurance scheme, which entitles people to specific social security benefits – known as “contributory benefits” – through a history of contributions to the scheme made by themselves and by their employers.

First proposed by David Lloyd George in the People’s Budget of 1908, it was introduced in 1912 to create a national system of insurance for working people against illness and unemployment.

While a portion of the national insurance fund is set aside for the NHS, the rest funds contributory benefits. So to do away with national insurance will further harm the contributory principle that is a key defence of welfare.

On the other hand, to give due weight to the downsides national insurance, it is true to say that its rates have become opaque and difficult to calculate. It is because of this opacity, and therefore the ability for govenments to raise it quietly, that the Chancellor is said to be suspicious of national insurance as a “stealth tax”.

But its contributory principle means that accusations from the TaxPayers’ Alliance, among others, that national insurance has become indistinguishable from income tax, with any division merely “academic”, is wrong.

Overall the plan looks likely to be popular with Conservative MPs and voters. The biggest obstacle, however, is likely to be practical rather than ideological: namely, the risks associated with the ambitious IT system that would be needed to implement the merge.

The prospect is a daunting one following the chain of problems, and attendant bad press, that have occurred in the technology developed for the Department for Work and Pensions’ flagship Universal Credit policy, which has suffered delays and multi-million pound write-offs.

According to the Times, it was only such fears of a Whitehall IT disaster that restrained the Chancellor from announcing the move in this year’s budget in April.

The public-awareness campaign needed to explain the merge would present another challenge, as public misunderstanding would lead to the perception that the government was simply hiking tax rates overall.

Other questions remain too. Will pensioners, for example, whose pension incomes are exempt from national insurance contributions, still enjoy the lower tax rate if they continue to work?

And the million-dollar question: how will the shortfall from employers’ contributions to national insurance be made up? It remains to be seen whether corporation tax would be raised, for example, or whether income tax on employees would have to cover it.

Lucy Fisher writes about politics and is the winner of the Anthony Howard Award 2013. She tweets @LOS_Fisher.


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Geoffrey Howe dies, aged 88

Howe was Margaret Thatcher's longest serving Cabinet minister – and the man credited with precipitating her downfall.

The former Conservative chancellor Lord Howe, a key figure in the Thatcher government, has died of a suspected heart attack, his family has said. He was 88.

Geoffrey Howe was the longest-serving member of Margaret Thatcher's Cabinet, playing a key role in both her government and her downfall. Born in Port Talbot in 1926, he began his career as a lawyer, and was first elected to parliament in 1964, but lost his seat just 18 months later.

Returning as MP for Reigate in the Conservative election victory of 1970, he served in the government of Edward Heath, first as Solicitor General for England & Wales, then as a Minister of State for Trade. When Margaret Thatcher became opposition leader in 1975, she named Howe as her shadow chancellor.

He retained this brief when the party returned to government in 1979. In the controversial budget of 1981, he outlined a radical monetarist programme, abandoning then-mainstream economic thinking by attempting to rapidly tackle the deficit at a time of recession and unemployment. Following the 1983 election, he was appointed as foreign secretary, in which post he negotiated the return of Hong Kong to China.

In 1989, Thatcher demoted Howe to the position of leader of the house and deputy prime minister. And on 1 November 1990, following disagreements over Britain's relationship with Europe, he resigned from the Cabinet altogether. 

Twelve days later, in a powerful speech explaining his resignation, he attacked the prime minister's attitude to Brussels, and called on his former colleagues to "consider their own response to the tragic conflict of loyalties with which I have myself wrestled for perhaps too long".

Labour Chancellor Denis Healey once described an attack from Howe as "like being savaged by a dead sheep" - but his resignation speech is widely credited for triggering the process that led to Thatcher's downfall. Nine days later, her premiership was over.

Howe retired from the Commons in 1992, and was made a life peer as Baron Howe of Aberavon. He later said that his resignation speech "was not intended as a challenge, it was intended as a way of summarising the importance of Europe". 

Nonetheless, he added: "I am sure that, without [Thatcher's] resignation, we would not have won the 1992 election... If there had been a Labour government from 1992 onwards, New Labour would never have been born."

Jonn Elledge is the editor of the New Statesman's sister site CityMetric. He is on Twitter, far too much, as @JonnElledge.