Fix our existing National Insurance system instead of adding a new Levy, urges new report

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 London School of Economics, the University of Warwick and the CAGE Research Centre.

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 Insurance that would instead raise money by plugging gaps in our current system.

Using publicly accessible tax data from HMRC, the authors find that:

· 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.

Arun Advani, Assistant Professor at the University of Warwick and a CAGE Associate, said: 'It's great to see that the government has belatedly recognised the problems of just increasing national insurance contributions alone. But the planned changes keep the regressive nature of NICs.'

Andy Summers, Associate Professor at the London School of Economics and a CAGE Associate, 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 the London School of Economics, 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 the London School of Economics, said: 'Young people and lower earners have already been hit hard 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.'

Read the report

A copy of the report is available here.

The authors have previously published reports on:

o How much tax do the rich really pay?

o A wealth tax for the UK