Election tax tease: National Insurance - The 'tax on jobs'

George Osborne and the Conservative Party have pledged to reverse a planned rise in National Insurance Contributions (NICs). This has been welcomed by business leaders and has been criticised by Labour as putting the recovery at risk.

The so called 'tax on jobs' refers to Employers' NICs. It's the tax payable by employers by reference to their workers', employees' and directors' salaries. The current tax is 12.8% and Labour have announced two 0.5% rises which are both due to take effect from April 2011 when the tax will increase to 13.8%. Incidentally, 30 years ago, in 1980, the rate was 13.7%.

It is the aggregate 1% rise in the tax that the Tories have pledged to reverse and this announcement has been welcomed by a wide range of business leaders.

Labour's plans also affect the NICs payable by the self employed and by all employees. A 0.5% rise was announced in 2008 and a further 0.5% rise was announced in 2009. The aggregate 1% rise was to take effect from April 2011. This increase too would be cancelled under Tory plans.

Those who disagree with the Tories' plan focus on the need to fund the 'tax cut'. The tax due to be raised by the 1% increase in employers' NICs is c£4.5bn pa. The Treasury estimate that the total cost of this proposal is £7bn pa. You won't find that figure in the 2010 Budget 'red book' however, as, in an effort to fool everyone, the increase in NI was contained in two separate announcements and therefore the impact and the money to be raised are in separate tables (A2 and A11). £7bn is approx the aggregate of the relevant figures in those tables. Meanwhile Peter Mandelson is claiming the cost will be £30bn. If that were the case then surely the tables should show £30bn as the tax to be raised by the increase!

The Tories say that the related adjustments mean that the total cost of their NI proposals would only be £5.6bn pa, falling to £4bn over time. In isolation it's clearly a lot of money. But it's a small fraction of the forecast deficit of £167bn in 2011. And Labour have been just as evasive as regards how this is to be cut significantly as have the Tories. As such it is hard to see any justification in arguing that this £7bn alone will "put the recovery at risk" and lead to deeper public spending cuts.

What do you think?

I wrote a related piece yesterday titled: "Election tax tease: National Insurance and Income Tax alignment."

Election tax tease: National Insurance and Income Tax alignment

I've long criticised the way that Politicians try to imply that National Insurance is not a tax. So far as everyone who pays it is concerned it IS a tax.

What I dislike even more is when Politicians attempt to confuse the issue by referring to biased reviews and reports.

Four years ago, while Gordon Brown was still Chancellor, he announced in Budget 2006 that the Government would review the case for closer alignment of income tax and national insurance. The outcome of this review was the Treasury document, published in 2007: Income tax and national insurance alignment: an evidence-based assessment.

In Alistair Darling's Pre-Budget Report in October 2007 he reported that "the benefits of further alignment would be outweighed by the disadvantages." Whilst this was an accurate statement about the report it was misleading given the restrictions imposed on the Treasury's review!

In practice the Treasury were under instructions to take the current policy framework as fixed in stone. The rationale being that income tax and NICs have different purposes as NICs provide entitlement to contributory benefits. Thus, contrary to the hopes of many, the Treasury review had NOT considered any ideas in the context of merging income tax and NICs into one charge. The conclusion of the review was simply that further alignment, based on the pre-conceptions adopted within the report:

• Would result in lower savings for employers than might be expected.
• May adversely impact lower-paid individuals.
• Would result in high costs for the exchequer.

The purpose of the document was only to consider how to make NICs operate in a similar way to income tax. The two areas specifically considered being a move onto an annual basis and collecting NICs by reference to cumulative income levels. A number of related administrative changes did follow. However many detailed rules continue to operate differently when computing income subject to income tax as distinct from NICs.

And, of course, the other practical problem is that it would be political suicide to scrap NI and as a consequence increase the basic rate of income tax, possibly upto 30%. Additionally Pensioners would need an exemption (as they don't pay NI) and an alternative method would be required to determine entitlement to those benefits and pensions that are dependent on your NI Contribution (NIC) record. So it's not as easy as some people seem to suggest. But considering the options should not be off limits. Do you agree?

Do you think it would be more honest to combine income tax and NICs? And to relate benefit entitlement to a feature of the income tax system rather than NICs themselves?

Truncated Finance Bill is an affront to democracy

As part of the 'wash up' before Parliament finished its pre-election business, the 2010 Finance Bill has passed through in record time with very little debate. To facilitate this and to avoid extended arguments with opposition parties a number of contentious clauses were dropped.

If Labour are re-elected the dropped clauses will form part of a second Finance Bill that will also include those Budget announcements that were not in the first Finance Bill.

The key Budget proposals dropped from the 167 page Finance Bill published last week were:

• The increased duty on cider (clause 9)
• The abolition of the special rules related to Furnished Holiday Lettings (clause 65)
• The new landline duty on phone lines to pay for super-fast broadband (clause 23)
• The obligation to provide security for payment of PAYE (clause 58)

In another sad day for democracy other contentious issues have passed into law despite the absence of any material debate or discussion. I anticipated this scenario in my post last week: Finance Bill 2010 proves Parliament doesn't decide our tax laws. And some people wonder why I stopped giving tax advice!