Call for National Insurance rethink
Published 26/11/2010 | 04:12
Government plans for a universal state pension remove the last justification for the National Insurance system, a think-tank has claimed.
The Centre for Policy Studies said the current system was "riddled with anomalies, complexity and a lack of cohesion", and as a result very few people understood how it worked.
The benefits people received from it were often lower than those received by people who had not contributed to it, the group said.
It added that National Insurance, which is currently charged at 11% of earnings of between £5,720 and £43,888 a year, after which it is paid at 1%, created a high marginal tax rate for low earners as well as creating a burden on employers taking on staff.
At the same time, it said the system had also been used to disguise tax increases while money was diverted away from the fund to use for other purposes, such as the NHS and green taxes.
The group said recent plans announced by the Government to introduce a universal state pension of £140 a week, which is likely to be paid to people based on a residency criteria, rather than the number of years they have paid National Insurance, meant the scheme could no longer by justified.
It added that once incapacity benefit was phased out, only 6% of benefits will be paid from the National Insurance Fund.
In a report, written by tax and benefit analyst David Martin, the group argues that National Insurance should instead be merged with income tax to create a simple payroll tax.
Mr Martin said the change should be planned for now, but only introduced once the fiscal situation had improved, as it would require a small overall tax cut, so that the self-employed were not penalised.
Centre for Policy Studies director Jill Kirby said: "The merger of tax and National Insurance would lead to a much higher headline rate of tax. Such a step would provide a simpler, more transparent and more honest approach to taxation. Politicians wishing to raise taxes would no longer be able to hide behind the device of raising National Insurance rates."