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26 January 2022

National Insurance has become the stealth tax of choice

The main NI rate is set to rise to 13.25 per cent having stood at just 5.5 per cent in 1975.

By Ben van der Merwe

With the cost of living rising more rapidly than at any point in the last 30 years the plan to raise National Insurance rates in April is attracting growing concern within the government. On Tuesday Kwasi Kwarteng, the Business Secretary, became the second senior minister to call for a delay, echoing comments from Jacob Rees-Mogg, the Leader of the House of Commons, earlier this month.

The increase of 2.5 percentage points (half of which would be paid by employees) planned by Rishi Sunak, the Chancellor, would be the sharpest since 1975, when the current contributions system was introduced.

The Treasury argues that the increase in National Insurance would raise £12bn and is necessary to reduce the government deficit, despite recent data showing that public borrowing fell by £13bn more than expected in 2021.

The Resolution Foundation has called on the government to raise income tax instead, arguing that a National Insurance rise would disproportionately affect young people and low earners. Unlike income tax, National Insurance is only paid on earned income and by working-age people, meaning people over the state pension age are exempt.

Rishi Sunak is not the first chancellor to see an increase in National Insurance as less politically painful than a rise in other taxes. Since the introduction of the modern National Insurance system in 1975, every prime minister except Theresa May and Gordon Brown has overseen an increase in employees’ contributions. None have reduced the rate, which has gradually risen from 5.5 per cent to 12 per cent.

Over the same period the top rate of income tax has fallen from 83 per cent to 45 per cent.

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