Fixing the biggest gaps in our existing National Insurance system would bring in more revenue than the government’s new Levy and would be fairer on younger and lower-paid workers, according to a new report by researchers from The London School of Economics and Political Science (LSE) and The University of Warwick.
The report argues that the Prime Minister’s plan to introduce a new Health and Social Care Levy of 1.25% is unfair because it will:
- Continue to tax younger workers more than pensioners.
- Continue to tax earnings from work more than income from wealth.
- Preserve the regressive rate structure of National Insurance.
- Increase taxes on employment by more than for the self-employed.
The authors recommend an alternative reform to National Insurancethat would instead raise money by plugging gaps in our current system.
Using publicly accessible tax data from HMRC, the authors find:
- Removing the current National Insurance exemptions for investment income and people of pension age would raise £12 billion. This is the same amount of revenue as the Government is targeting from its new Levy.
- Equalising National Insurance on higher earnings with the rates already paid by lower earners could raise an additional £20 billion. This would be enough to fund a cut in the main rate of NICs by 1.25p – instead of raising these rates, as the government is planning.
Under this alternative package of reforms, more of the revenue would come from London and the South-East, and from older, wealthier individuals.
Commenting on the new report, Dr Andy Summers, Associate Professor of Law at LSE and co-author of the report, said: “Focusing tax rises on younger and lower earners is a political choice. Our report shows that reforming our existing National Insurance system could raise the revenue that the government needs in a much fairer way.”
Hannah Thompson, Research Fellow at LSE and co-author, said: “Under our proposals, the government could get the additional revenue it needs whilst also funding a cut in the main rates of National Insurance, instead of raising them.”
Helen Hughson, Research Fellow at LSE and co-author added: “Young people and lower earners have already been hard-hit by COVID. The government’s new Levy is asking more from this group. Our alternative plan would ensure that older and higher-earning individuals paid their fair share.”