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10 September 2021

Boris Johnson is exploiting the public’s misunderstanding of National Insurance

Until NI is recognised as a tax, politicians will continue to raid the pay packets of the poorest to fund benefits for the wealthy.

By Rachel Cunliffe

After years of writing about intergenerational inequality and the burden placed on the young in this country to subsidise ever-increasing benefits for the old, this week I have finally realised what the problem is. 

There is simply no way to spin Boris Johnson’s new tax hike as anything other than an unjustifiable raid on working people. The rate of National Insurance is rising by over 10 per cent – from 12 per cent of earnings to 13.25 per cent – with the lowest-paid workers suffering the biggest proportional increase. A nurse, a care worker, a supermarket delivery driver – all will see their pay cut, with those on incomes of £24,000 paying an additional £180 in tax a year, and for what? To protect the wealth of those with substantial assets who need social care but don’t want to pay for it with their own money. As one anonymous MP put it: “We are asking people on low incomes to pay more tax so that privileged kids can inherit expensive houses.” 

How then can the Prime Minister get away with claiming this new tax – a levy on the working poor to subsidise the assets and inheritances of the rich – is “right, reasonable and fair”? 

The answer came to me courtesy of a Sky News segment broadcast just after the plans were announced. A lady called Karen speaks emotively about her struggle to access adequate social care under the current system: “We’ve paid our National Insurance, we paid our taxes, we paid our pensions – where’s all that money gone?” she asks. “We’ve already paid into the system, why are we being asked to pay again?” 

I mean no disrespect to Karen, who is suffering from multiple sclerosis and clearly sincerely believes what she is saying. Nor do I know the details of her individual circumstances. But insomuch as she is speaking on behalf of her age cohort, she is, sadly, quite wrong. 

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It is simply not the case that, as a group, those in need of old-age social care now contributed sufficient amounts into the system to fund the benefits they require. According to research undertaken by the Resolution Foundation think tank, people born in 1956 will each receive on average £291,000 more over a lifetime from the welfare state than they paid in, compared to £132,000 for people born in 1996. Yes, they paid the taxes and National Insurance that were required of them, but not nearly to a level that reflects what they have taken out. 

Most people evidently do not realise this. My experience over the past few days of trying to explain these facts to enraged Twitter users – citing ONS data that show pensioners are the second wealthiest cohort of all age groups in the UK, noting pensioner households are statistically more likely to be millionaires than to live in poverty, pointing out that those born between 1946 and 1965 enjoy over 25 times the wealth owned by the millennial cohort – reveals a vast disconnect between what people think they are owed and economic reality. 

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The reason for this lies in part with a fundamental misunderstanding of what we mean by “National Insurance”. To millions, it clearly evokes a ring-fenced store of money, a social insurance scheme that users pay into over the course of their working lives, to fund benefits after they retire. Being asked to contribute again for something you thought you’d paid for understandably sparks outrage. 

But National Insurance is nothing of the sort. While it’s true that contributions do initially go into a pot known as the National Insurance Fund, in reality this is hardly distinguishable from general taxation. As the fact-checking website FullFact puts it: “in practice, some money flows into the fund that doesn’t come from NI contributions and some money flows out that doesn’t go to pensions or contributory benefits. In other words, whatever the amount of NI contributions the government raises in a given year, it always finds a way to pay the pensions and benefits it has to.” If the fund is low, due to taxpayers not contributing enough or to increased demands from an ageing population and the rising costs of the state pension, the government tops it up from general taxation.  

Essentially, National Insurance is just a form of income tax by another name.  

Which leads us to the second basic misunderstanding. In the Sky clip, Karen suggests that her NI contributions over the years mean she has paid for her own pension and social care, as though the money was put into a savings account for her. What she actually paid for were the pensions and benefits of the generations that came before her – generations which were, on the whole, less expensive for taxpayers due to shorter life expectancies putting less strain on the state pension and the healthcare system. In 1974, the proportion of the population aged over 65 was 13.8 per cent; in 2014, it was 17.7 per cent; and it is projected to rise to 24.3 per cent – almost a quarter – in the next 18 years. The National Insurance contributions of those who are currently retired were spread among far fewer people than the contributions of workers today. 

In addition, these previous cohorts for the most part did not receive state-funded social care – the whole point of the government’s new plan is purportedly to prevent individuals from having to pay their own care costs, as the vast majority of people have until now. 

So in answer to Karen’s question of “where did the money go?”, the reply is that it was spent – on the generations before who did not receive the benefits that are now being demanded, and on the NHS in general, which has required more funds each year. The cost of these extra benefits will fall on those who are working today – who, thanks to Boris Johnson’s tax rise, now face an additional levy that will take taxes to their highest sustained level since the Second World War. 

That is not to suggest Karen – or anyone else – is undeserving of care, or to underplay the crisis in the current broken system. But the idea that this is something to which pensioners are entitled because they funded it is a convenient myth that enables the government to justify a tax hike that will hit workers who are already overly burdened by a system that is stacked against them. 

Until people realise this – until the misnamed National Insurance is recognised for what it is: an extra tax – politicians will continue to raid the pay packets of the very poorest to fund benefits for the wealthy. And the British public will let them do it.