National Insurance Contributions

National Insurance was first introduced in 1911 by the Liberal government at the time. The first part of national insurance provided health insurance for employees, whereby both employees and employers contributed fixed amounts towards a health insurance fund. In turn, employees received free treatment for conditions such as tuberculosis. The second part of national insurance covers unemployment, with limited unemployment benefits provided to workers in highly cyclical industries. Nowadays, national insurance is levied to provide benefits across the board. This includes state pensions, statutory sick pay, maternity leave and entitlements to additional unemployment benefits. More recently, the government has introduced to increase national insurance to raise money for social care. This well-intentioned plan fails to resolve the underlying issues within the NHS, with the extra-funding likely leading to more waste and inefficiencies whilst simultaneously slowing economic growth and squeezing those in the low and middle classes.

Background

National insurance is currently paid by both employers and employees, as well as the self-employed. With this said, those who are above the state pension age are not mandated to do so. However, the aforementioned will not be true from 2023 as the newly introduced health and social care levy will apply to pensioners. Contributions entitle citizens to certain state benefits, although these vary depending on your employment status. For example, those self-employed are entitled to less than employees. To qualify for state pensions, individuals must pay into national insurance for a certain number of years.

Amongst the various options that politicians have, raising national insurance is a popular ploy due to the positive connotations that are associated with it. By 2022, the rate of national insurance will have more than doubled in less than sixty years; in 1977, it stood at 5.75% and next year the burden will reach 13.25%.

Recent Developments

Last week, the government announced drastic tax hikes to fund the so-called ‘social care crisis’ in the UK. From April 2022, national insurance contributions from both employees, employers and the self-employed will increase by 1.25% on income above £9,568. This will apply to those working beyond the state pension age from April 2023. Such a tax increase goes against the government’s ‘triple-lock’ promise in 2019 to keep rates the same during their tenure, with the Prime Minister attributing the coronavirus outbreak as responsible for the newly unveiled tax increase. Former Conservative leader and Prime Minister John Major described the tax as ‘regressive,’ due to an equal levy on both low and high-income earners.

Effects

The increase in National Insurance will undoubtedly hurt the economy in the long run. The timing of this tax increase fails to reconcile the impact of the pandemic on businesses and employment, with businesses becoming increasingly reluctant to hire workers. Increasing taxes on employers only makes hiring and training new employees less likely, with existing employees likely to bear the burden of long hours and overtime to compensate. In this way, the National Insurance increase will harm employment in the long run, thereby slowing long-term economic growth.

Employees will too need to pay more national insurance, at a rate of 13.25% on income between £9,568-£50,270 effective April 2022, with 3.25% on earnings above £50,270. At the same time, as income tax brackets will not be adjusted for inflation over the coming years, employees are being hit with an effective double tax increase. Increasing national insurance on employers will also negatively affect existing employees, as lower wage growth is to ensue given the need for employers to offset the incoming tax hike without harming business activity. Thus, not only will the unemployed feel the burden of the national insurance increase, existing employees will see wage growth stagnate.

The main aim of the tax increase is to provide an additional £12 billion in funding for social care within the NHS. However, given the amount of bureaucracy and waste that lies in the National Health Service, it is unlikely that the £12 billion in additional funding will make little if any difference to current health standards. However, reforms to the NHS are politically impossible due to its unfounded popularity, with comparisons to the American healthcare system immediately mentioned when reforms to the NHS are discussed. This is whilst more successful systems that incorporate both the benefits of the public and private sectors are ignored.

Ultimately, the increase in National Insurance represents a catastrophic failure on the part of the government. Whilst politically popular, it will decrease long-term economic growth with both employees and employers being negatively impacted over the coming years. A strong economy is vital to generate the tax revenues needed to fund healthcare and in this way, this tax increase might effectively decrease the amount of money available for the NHS in the long run, due to the reduced economic growth that may ensue.