A national insurance hike to boost social care would be built on a misunderstanding

Published

4 years ago

July 20, 2021

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Boris Johnson and Rishi Sunak have, it is reported, agreed to pay for long term reform of social care by raising national insurance by a penny in the pound for both employers and employees.

The move would raise an estimated £10bn annually.

The government is braced for unease among its backbenchers because the Conservatives promised not to raise income tax or national insurance in their election-winning 2019 manifesto.

It perhaps ought not to be too worried about that. The prime minister can always point to the crisis in social care and the need, more broadly, to repair the public finances after the COVID-19 pandemic.

The chancellor, meanwhile, can point out that one of his predecessors, Gordon Brown, did something similar in his April 2002 budget. Having pledged not to raise income taxes in Labour’s election-winning 2001 manifesto, Mr Brown broke the spirit of that promise, slapping more than 4 million workers with a 1% increase in national insurance.

The risk of breaking an election promise is the least of the problems with this proposal.

For a start, the move will perpetuate the myth that national insurance is some kind of special safety net, hypothecated to pay for pensions, unemployment benefits and other elements of the welfare state such as the NHS.

It is remarkable how many people still believe this when, for many years, national insurance has simply been income tax by another name.

Yes, there is something called the National Insurance Fund, but essentially it is a government accounting wheeze.

The money raised in national insurance contributions is insufficient to pay for the benefits and public services that many people think they do. It just disappears, effectively, into the government’s coffers and is spent in the same way that revenues from income tax, VAT and corporation tax are spent.

Because the UK state pension system is a so-called ‘pay as you go’ system, the national insurance paid by today’s workers pays the pensions of today’s pensioners, not their own.

This misunderstanding of national insurance may be precisely why the government is proposing going to go down this route.

Polling suggests people are happier paying national insurance rather than income tax because they genuinely appear to believe they are getting something, a benefit, for doing so.

It is why chancellors down the years have reached for national insurance as their favoured stealth tax. In 1979, national insurance receipts were equal to half of income tax receipts. This year, according to the Treasury, they will be equal to roughly three-quarters of income tax receipts.

There are also other problems with this proposal.

One is that it exacerbates intergenerational unfairness. Unlike income tax, workers of state pension age do not pay national insurance on their earnings, so the hike will fall entirely on younger workers.

Moreover, because national insurance – unlike income tax – is levied only on earnings, rather than other sources of income, such as interest on savings, the cost of this measure will fall disproportionately on younger people rather than older ones.

In other words, having made sacrifices throughout the pandemic to protect older people, younger people will again be paying through their earnings for a benefit that will benefit older people rather than themselves.

This move, then, may deepen the problems the Conservatives have with younger voters.

An explicit aim of reforming social care is to prevent people having to sell their homes to pay for such care. Younger people, unable to buy a home in the first place, may wonder why they are being asked to pay higher national insurance contributions so that others may keep theirs.

Others will criticise the lack of progressivity in this proposal.

All workers (other than those earning more than £100,000 annually and who do not benefit from the personal allowance) can earn up to £12,570 before they have to start paying income tax. By contrast, national insurance kicks in as soon as a worker has earned £9,568.

Accordingly, a wealthy pensioner living off a generous final salary pension or on income from their savings and dividends will not be paying this proposed hike, but a low-paid worker earning just £184 per week will be.

Another major problem with this proposal is the unwanted consequences it will have. Taxes, by their nature, reduce the activity on which they are levied. It is why chancellors tax smoking heavily.

Because this proposed national insurance will fall on employers, as well as employees, it will make the cost of hiring someone more expensive.

Higher payroll taxes mean fewer people in work and, potentially, lower growth. It is why, in response to Mr Brown’s national insurance hike in 2002, the then-Conservative leader, Iain Duncan-Smith, called the move a “tax on jobs”.

So, too, did David Cameron and George Osborne when Mr Brown ordered his chancellor, Alistair Darling, to announce a 1% rise in national insurance in March 2010 to pay for the financial crisis. Mr Darling had wanted to increase VAT instead. Mr Brown’s decision ensured Labour had barely any support from business in that year’s general election.

So, to conclude, what the PM is proposing is a tax increase that will disproportionately hit younger and low-paid workers while making it harder for employers to hire people.

Or, as Nick Macpherson, the former permanent secretary at the Treasury, put it on Twitter: “Rentiers and trustafarians won’t have to pay a penny. And the low paid young will subsidise the wealthy old. Higher spending does require higher taxes. But national insurance is a regressive tax on jobs.”

Quite.

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Interest rate cut to 4.25% by Bank of England

Published

20 hours ago

May 8, 2025

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Interest rate cut to 4.25% by Bank of England

The Bank of England has cut interest rates from 4.5% to 4.25%, citing Donald Trump’s trade war as one of the key reasons for the reduction in borrowing costs.

In a decision taken shortly before the official confirmation of a trade deal between Britain and the United States, the Bank’s monetary policy committee (MPC) voted to reduce borrowing costs in the UK, saying the economy would be slightly weaker and inflation lower in part as a result of higher tariffs.

However, it stopped short of predicting that the trade war would trigger a recession.

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Further rate cuts are expected in the coming months, though there remains some uncertainty about how fast and how far the MPC will cut – since it was split three ways on this latest vote.

Two members of the nine-person MPC voted to reduce rates by even more today, taking them down to 4%. But another two on the committee voted not to cut them at all, leaving them instead at 4.5%.

In the event, five members voted for the quarter point cut – enough to tip the balance – with the accompanying minutes saying that while “the current impact of the global trade news should not be overstated, the news was sufficient for those members to judge that a reduction in Bank Rare was warranted.”

Even so, the Bank’s analysis suggests that while higher tariffs were likely to depress global and UK economic growth, and help push down inflation, the impact would be relatively minor, with growth only 0.3% lower and inflation only 0.2% lower.

Governor, Andrew Bailey, said: “Inflationary pressures have continued to ease, so we’ve been able to cut rates again today.

“The past few weeks have shown how unpredictable the global economy can be. That’s why we need to stick to a gradual and careful approach to further rate cuts. Ensuring low and stable inflation is our top priority.”

The Bank raised its forecast for UK economic growth this year from 0.75% to 1%, but said that was primarily because of unexpectedly strong output in the first quarter.

In fact, underlying economic growth remains weak at just 0.1% a quarter.

It said that while inflation was expected to rise further in the coming months, peaking at 3.5% in the third quarter, it would drop down thereafter, settling at just below 2% towards the end of next year.

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Trump set to announce US will agree trade deal with UK, Sky News understands

Published

1 day ago

May 8, 2025

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Trump set to announce US will agree trade deal with UK, Sky News understands

Donald Trump is set to announce that America will agree a trade deal with the UK, Sky News understands.

A government source has told Sky’s deputy political editor Sam Coates that initial reports about the agreement in The New York Times are correct.

Coates says he understands a “heads of terms” agreement, essentially a preliminary arrangement, has been agreed which is a “substantive” step towards a full deal.

Three sources familiar with the reported plans had earlier told the New York Times that the US president will announce on Thursday that the UK and US will agree a trade deal.

Shortly after the report emerged the value of the British pound rose by 0.4% against the US dollar.

Mr Trump had earlier teased that he would be announcing a major trade deal in the Oval Office at 10am local time (3pm UK time) on Thursday without specifying which country it had been agreed with.

Writing in a post on his Truth Social platform on Wednesday, he said the news conference announcing the deal would be held with “representatives of a big, and highly respected, country”.

He did not offer more details but said the announcement would be the “first of many”.

A White House spokesperson has declined to comment on the New York Times report.

Senior Trump officials have been engaging in a flurry of meetings with trading partners since the US president announced his “liberation day” tariffs on both the US’ geopolitical rivals and allies on 2 April.

Mr Trump imposed a 10% tariff on most countries including the UK during the announcement, along with higher “reciprocal” tariff rates for many trading partners.

However those reciprocal tariffs were later suspended for 90 days.

Britain was not among the countries hit with the higher reciprocal tariffs because it imports more from the US than it exports there.

However, the UK was still impacted by a 25% tariff on all cars and all steel and aluminium imports to the US.

A UK official said on Tuesday that the two countries had made good progress on a trade deal that would likely include lower tariff quotas on steel and cars.

Mr Trump said the same day that he and top administration officials would review potential trade deals with other countries over the next two weeks to decide which ones to accept.

Last week he said that he has “potential” trade deals with India, South Korea and Japan.

Asked on Sky News’ Breakfast programme about the UK-EU summit on 19 May and how Mr Starmer would balance relationships with the US and EU, Coates said: “I think it is politically helpful for Keir Starmer to have got the heads of terms, the kind of main points of a US-UK trade deal, nailed down before we see what we have negotiated with the EU — or, more importantly, Donald Trump sees what we have negotiated with the EU.”

Coates said there was “always a danger” that if it happened the other way around, Mr Trump would “take umbrage” at negotiations with the EU and “downgrade, alter or put us further back in the queue” when it came to a UK-US trade deal.

US and Chinese officials to discuss trade war

It comes as the US and China have been engaged in an escalating trade war since Mr Trump took office in January.

The Trump administration has raised tariffs on Chinese goods to 145% while Beijing has responded with levies of 125% in recent weeks.

US Treasury secretary Scott Bessent and US trade representative Jamieson Greer are set to meet their Chinese counterparts in Switzerland this week to discuss the trade war.

China has made the de-escalation of the tariffs a requirement for trade negotiations, which the meetings are supposed to help establish.

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UK-India trade deal: Is Farage right to call out ‘big tax exemption’?

Published

2 days ago

May 7, 2025

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UK-India trade deal: Is Farage right to call out 'big tax exemption'?

Britain’s trade deal with India has created a pocket of controversy on taxation.

Under the agreement, Indian workers who have been seconded to Britain temporarily will not have to pay National Insurance (NI) contributions in the UK. Instead, they will continue to pay the Indian exchequer.

The same applies to British workers in India. It avoids workers from being taxed twice for a full suite of benefits they will not receive, such as the state pension.

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Politicians of all stripes have leapt to judgement.

Nigel Farage has described it as a “big tax exemption” for Indian workers. He said it was “impossible to say how many will come,” with the Reform Party warning of “more mass immigration, more pressure on the NHS, more pressure on housing.”

But, is this deal really undercutting British workers or is it simply creating a level playing field?

Be wary of any hasty conclusions. In the absence of an impact assessment from the government, it is difficult to be precise about any of this. However, at first glance, it is unlikely that some of Reform’s worst fears will play out.

Firstly, avoiding double taxation is not the same thing as a “tax break.’ This type of agreement, known as a double contribution convention, is not new.

Britain has similar arrangements with other countries and blocs, including the US, EU, Canada and Japan.

It’s based on the principle that workers shouldn’t be paying twice for social security taxes that they will not benefit from.

Indian workers and businesses will still have to pay the equivalent tax in India, as well as sponsorship fees and the NHS surcharge.

Crucially, the deal only applies to workers being sent over by Indian companies on a temporary basis.

Those workers are on Indian payroll. It does not apply to Indian workers more generally. That means businesses in the UK can’t (and won’t) suddenly be replacing all their workers with Indians.

The conditions for a company to send over a secondee on a work visa are restrictive. It means it’s unlikely that these workers will be replacing British workers.

However, It does mean that the exchequer will not capture the extra national insurance tax from those who come over on this route.

The government has not shared its impact assessment for how many extra Indians they expect to come over on this route, how much NI they will escape, or how much this will be offset by extra income tax from those Indians. The net financial position is therefore murky.