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Is This The End Of National Insurance?

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Is this the end of National Insurance?

http://www.telegraph.co.uk/news/politics/georgeosborne/11754609/Is-this-the-end-of-National-Insurance.html

NHS privatisation, debt privatisation ... NI privatisation?

Probably not as it is such a good little earner for the Treasury.

These studies come along every few years but nearly always end up kicked into the long grass because they are politically "difficult".

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National Insurance reform could cost us dear. A 'simpler’ tax system would provide politicians with yet another opportunity to pick our pockets........

.....Instead of dreaming up even more opportunities to fleece us, the Conservatives should be looking to the long-term unsustainability of the welfare state and aiming for greater private provision, more individual responsibility, less state interference and lower taxes. Rather than moving further away from the concept of a genuine social insurance system, we should be trying to establish one that the Treasury cannot plunder.

http://www.telegraph.co.uk/finance/personalfinance/tax/10658144/National-Insurance-reform-could-cost-us-dear.html

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It was expanded after the Second World War to help fund the health service and wider social security programmes, and is now charged at 12p for every pound of income.

I hate it when NI is covered in this way - it is (about) 25% of income, just that only 12% is shown as deducted from earnings - the rest is deducted from your earnings by your employer even before it gets to your paye return.

A flat tax will prove to be problematic - if people realise that the base rate of tax is about 46%, and the higher rate about 56% then they might get cross.

They (tories) won't want to make a true flat rate as too many wealthy people pay themselves via dividends rather than paye - although I note that the new dividend tax has evened things out a little.

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NI is a horrible con, particularly the employer paid part which is mostly hidden from sight. When you include employer's NI along with employee income tax, the top rates of tax in the UK are huge. E.g. on income over 150K:

Income tax - 45%

Employee NI - 2%

Employer NI - 13.8%

So nearly 61% in total. The only honest thing to do would be to get rid of it and adjust income tax rates up accordingly so people could see what they were actually paying.

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As mentioned, it should be abolished and replaced with a higher level of income tax, but there are multiple problems:

1. If you get rid of it completely (my preferred choice) then the treasury lose huge sums from the loss of Employers NIC element of 13.8%.

2. If you raise income tax to compensate, putting it to 32% isn't enough because of the above. You're probably going to have to raise the basic rate to nearly 50% to compensate (I did a rough and ready calc - someone earning £26,400 pays £9k in tax (including the 13.8% Ers NIC - to get that same £9k under a new income tax only system would require a 56% rate of income tax above the personal allowance - ie, the BASIC rate would need to rise to 56%). This is politically impossible.

3. The alternative is to try and just raise it to 32% and 'hope' that employers increase their workers salaries to offset the fact that they are now richer. I suspect this will happen, but it will take years to dribble through (A few reasonable employers will do it, but most won't until forced to do so by market economics of staff leaving). In those 10 years, the lost revenue is huge.

4. Pensioners are completely stuffed. They never paid NI, and suddenly their income tax has more than doubled. They will (to the extent they can) riot.

The best solution appears to be to scrap NIC in total, raise income tax to 32% and then introduce a jobs tax (you can't call it that however) on employers of *ahem* 13.8%. Then maybe, if you are that way inclined, phase it out by reducing it by 1% a year for the next fourteen years.

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As mentioned, it should be abolished and replaced with a higher level of income tax, but there are multiple problems:

1. If you get rid of it completely (my preferred choice) then the treasury lose huge sums from the loss of Employers NIC element of 13.8%.

2. If you raise income tax to compensate, putting it to 32% isn't enough because of the above. You're probably going to have to raise the basic rate to nearly 50% to compensate (I did a rough and ready calc - someone earning £26,400 pays £9k in tax (including the 13.8% Ers NIC - to get that same £9k under a new income tax only system would require a 56% rate of income tax above the personal allowance - ie, the BASIC rate would need to rise to 56%). This is politically impossible.

3. The alternative is to try and just raise it to 32% and 'hope' that employers increase their workers salaries to offset the fact that they are now richer. I suspect this will happen, but it will take years to dribble through (A few reasonable employers will do it, but most won't until forced to do so by market economics of staff leaving). In those 10 years, the lost revenue is huge.

4. Pensioners are completely stuffed. They never paid NI, and suddenly their income tax has more than doubled. They will (to the extent they can) riot.

The best solution appears to be to scrap NIC in total, raise income tax to 32% and then introduce a jobs tax (you can't call it that however) on employers of *ahem* 13.8%. Then maybe, if you are that way inclined, phase it out by reducing it by 1% a year for the next fourteen years.

I think a one-off tax neutral change would be possible. It would have to be a legal requirement for all salaries (including the minimum wage) to be put up by 13.8% on the day the tax moved from employers side to the employee. No doubt there would be some companies that tried to get around it but, assuming that the bulk complied, the rest would have to fall in line in the end or they'd lose employees to competitors pretty rapidly. The stuff on the employee side is easy and could be handled with some extra tax bands initially.

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When a gross salary is quoted (e.g. Diversity Officer on 26k a year), is the Employers NIC on top of that? In which case you have to go careful with these percentages!

Don't you think the "simplest" solution is "scrapping NIC" whilst quietly retaining the Employer contribution?

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NI is a horrible con, particularly the employer paid part which is mostly hidden from sight. When you include employer's NI along with employee income tax, the top rates of tax in the UK are huge. E.g. on income over 150K:

Income tax - 45%

Employee NI - 2%

Employer NI - 13.8%

So nearly 61% in total. The only honest thing to do would be to get rid of it and adjust income tax rates up accordingly so people could see what they were actually paying.

Pah, just 61%. Imagine a graduate on 50K with two kids. Their effective marginal rate is made up of:

Income tax - 40%

Employee NI - 2%

Employer NI - 13.8%

Child benefit - 17%

Student loans - 9%.

Better to divert any income above 50K into salary sacrificed pension then one day get a quarter of it back tax-free and three-quarters at 20% (effective 15% overall). Even if they stop the marginal rate pension relief, it will still be more than worth it.

I still come across very few people that seem to understand any of this. Having NI/Income merged will shock many people about how little they get to keep.

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Pah, just 61%. Imagine a graduate on 50K with two kids. Their effective marginal rate is made up of:

Income tax - 40%

Employee NI - 2%

Employer NI - 13.8%

Child benefit - 17%

Student loans - 9%.

Better to divert any income above 50K into salary sacrificed pension then one day get a quarter of it back tax-free and three-quarters at 20% (effective 15% overall). Even if they stop the marginal rate pension relief, it will still be more than worth it.

I still come across very few people that seem to understand any of this. Having NI/Income merged will shock many people about how little they get to keep.

It's not 40% on all income though, is it?

But don't forget to add:

Council Tax - say a grand a year = 2%

VAT on basically everything

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If you're counting other taxes why not also count private taxes i.e rent or mortgage?

It's not 40% on all income though, is it?

But don't forget to add:

Council Tax - say a grand a year = 2%

VAT on basically everything

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If you're counting other taxes why not also count private taxes i.e rent or mortgage?

Because rent and mortgage payments don't go the government/local government. VAT and council tax do.

Otherwise you might as well regard transport, food and energy as a tax. That's fair enough, but it moves the goalposts rather more.

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From the July Budget:

"The government aims to have a tax system that is simple to understand and easy to comply with. The government will establish the Office of Tax Simplification (OTS) on a permanent basis with an expanded role and capacity. The new, expanded OTS will be put on a statutory footing in Finance Bill 2016, and will advise the government on how to deliver a simpler tax system, providing independent advice on options for addressing existing complexity in the tax system. The terms of reference for the next OTS reviews on the closer alignment of income tax and NICs and the taxation of small companies will be published shortly."

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It's not 40% on all income though, is it?

True, it's marginal rate (as used in the post I was responding to)

My point is that high marginal rates kill all motivation to increase earnings. I've had three recruiters calling recently offering better pay but I've told them its completely pointless to take it. The net marginal benefit just isn't worth it. It's a similar effect that DurhamBorn points out with the 16hr threshold for tax credits.

If "work more" means "get more", there is an incentive.

If "work more" means "nothing after costs", then there is no reason to do it.

Back in my 20's, my marginal rates were so much lower, I did what it took to boost my income. Worked abroad, got more skills, more responsible job, overtime, evening contract work etc.

Now, it's just not worth it.

The advice for my kids is:

1. Get a STEM degree whilst working and doing open courses => don't pay RPI++ for loans.

2. Hop jobs as necessary to get best experience and best pay => no workspace loyalty

3. Build somewhere to live in the garden (plenty of space) => don't pay a landlord

4. Learn as much as possible about the planning system and how to get around it

(saves £100K's.) => Don't pay the bankers.

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True, it's marginal rate (as used in the post I was responding to)

My point is that high marginal rates kill all motivation to increase earnings. I've had three recruiters calling recently offering better pay but I've told them its completely pointless to take it. The net marginal benefit just isn't worth it. It's a similar effect that DurhamBorn points out with the 16hr threshold for tax credits.

If "work more" means "get more", there is an incentive.

If "work more" means "nothing after costs", then there is no reason to do it.

Back in my 20's, my marginal rates were so much lower, I did what it took to boost my income. Worked abroad, got more skills, more responsible job, overtime, evening contract work etc.

Now, it's just not worth it.

The advice for my kids is:

1. Get a STEM degree whilst working and doing open courses => don't pay RPI++ for loans.

2. Hop jobs as necessary to get best experience and best pay => no workspace loyalty

3. Build somewhere to live in the garden (plenty of space) => don't pay a landlord

4. Learn as much as possible about the planning system and how to get around it

(saves £100K's.) => Don't pay the bankers.

Quite so, and presumably the % due to the loss of child benefit also reduces if you keep increasing income above £50K. Ditto student loans.

In short, for single income nuclear families of a certain age/level of education there's a particularly bad hump at £50K. IIRC, there's another around £100K too.

My strategy is the same as yours - everything at the higher tax rate goes into the pension in the (perhaps hopeful) expectation I'll retire earlier at a lower tax rate. I too will not work my guts out/move back to London for a little extra dollar/lot more hassle. My expenses are low and I'm content with my current living standards.

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Just a point on class 2 national insurance contributions, self employed.

I was under the impression that this had been abolished for 2015/16 and the June D/D of £11.00 was the final instalment for 2014/15. Howver, it's still going out...£13.75 taken in July. Presumably not abolished ?

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One thing people need to note that if NI gets merged with Income Tax then people will be paying it on their unearned as well as their earned income which is not the case at present. That would be a tidy little earner for the Treasury on any income earned outside of ISAs. And as the government are now trying to keep income tax and CGT rates in line they might decide to slap a bit more on those as well. To be honest I would have expected Labour to have called for this merger and the Tories to have been trying to avoid it as it will bring a lot of attention to how earned and unearned income is taxed which is largely hidden at the moment since NI whether Class 1 on employees or Class2/4 on the self employed effectively acts as a second tax on earnings which is not paid on unearned income including most BTL rentals.

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I still come across very few people that seem to understand any of this. Having NI/Income merged will shock many people about how little they get to keep.

Scary. I raised salary sacrifice with the Finance Director at work and asked if the 13,8% employer contribution saving could be passed to me in full or in part. He clearly didn't understand how it works. He was originally a salesman...

I think knowing or at least taking an interest in your effective tax rate makes us part of a different 1% club I think. A simplified system might make the left a bit quieter as it'll become very apparent to the aspiring classes that hard work literally means a few quid extra and a mahoosive tax bill.

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Some years ago I saved a graph onto my computer showing effective marginal rate against income, broken down into different taxes and benefit withdrawals. Obviously these things change over time (and according to circumstance) but does anyone have a good source for suck graphs?

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Some years ago I saved a graph onto my computer showing effective marginal rate against income, broken down into different taxes and benefit withdrawals. Obviously these things change over time (and according to circumstance) but does anyone have a good source for suck graphs?

Fairly up to date?

http://www.telegraph.co.uk/finance/personalfinance/tax/11544301/The-chart-that-shows-there-are-12-rates-of-income-tax.html

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In response to Crashmonitor's question; Class 2 National Insurance hasn't been abolished. From 2015/16 the contributions are to be paid with income tax on 31st January and 31st July. The amount payable will be calculated within the self assessment system. The last Direct Debits will be collected in July 2015.

I can't post a relevant link thanks to IE 11 in Windows 8.1. I suspect it is because of my abysmal IT skills, nothing to do with Microsoft!!

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Following on, I did a more proper example of the average UK salary of £26,000. For a person earning this in the UK, assuming no benefits, nor claiming tax credits (which I think they can't now anyway) and no additional allowances (Eg, Blind persons allowance, or age related allowance) and they are paid by a company then:

Income (gross) = £26,000

Income tax = £3,080 (20% after PA)

Ees NIC = £2,152.80

Ers NIC = £2,468.54

Total tax take = £7,701.34

Total cost to employer £28,468.54

Percentage of employer cost taken to tax = 27%

Scrapping national insurance, to ensure the SAME tax take on that employee, the percentages would need to be:

Income (gross) = £26,000

Increase in corporation tax received by government at 21% because Employer doesn't have to pay ERS NIC = £518 (21% of the additional £2,468.54 profit)

Therefore tax the employee needs to pay = £7,182.95 or (after personal allowance) the basic rate needs to be 47%

Hence why it is politically impossible to do this, even if the impact in the long run is the same. Trying to justify to your electorate that a new basic rate of 47% is the same as the present situation of 20% will not be believed. Trying to give them a years warning - "But you already pay over half your income each month in tax" will only make people wake up to how badly they are shafted by the government.

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Hence why it is politically impossible to do this, even if the impact in the long run is the same. Trying to justify to your electorate that a new basic rate of 47% is the same as the present situation of 20% will not be believed. Trying to give them a years warning - "But you already pay over half your income each month in tax" will only make people wake up to how badly they are shafted by the government.

Yes, but it would be really fun to see them try. :D

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