Jeremy Hunt, Britain’s Chancellor, decided to cut UK’s second-biggest tax – national insurance (NI) contributions – by 2 percentage points in Wednesday’s Budget.
It was a move that he said will benefit roughly 27 million employees and two million self-employed people.
He has since hinted he may abolish the tax as a whole and instead merge it with the income tax. Considering it is expected to bringin £172.3bn – 6.7 per cent of national income – this could be difficult.
So why do we have national insurance – and how will the changes affect us?
Why was national insurance created?
NI was introduced in 1911, brought in by then chancellor David Lloyd George, to provide a source of non-means-tested basic income during interruptions in earning capacity caused by sickness and (to a lesser extent) unemployment.
It was also used to pay the state pension, which had been launched in 1908.
Employers were required to record their workers’ NI contributions with stamps bought from the Post Office and affixed to a card.
There were several expansions over the years, and in 1975, a system of income-related contributions, similar to income tax, was introduced and the stamp cards were phased out.
Who pays national insurance?
NI contributions are a tax paid by employees and the self-employed on their earnings, and by employers on the earnings of those they employ.
The tax is not charged on those with low earnings, or on pension income or investment incomes, such as dividends or capital gains. Employee and self-employed contributions are not levied on the earnings of those over the state pension age.
What will change on 6 April?
On 6 April, the rates of NI contribution will decrease by 2 percentage points.
This means, for example, that the main rate for employees are cut from 10 per cent today to 8 per cent. For self-employed, the contributions has been cut from 9 per cent to 6 per cent, as of April.
The rate had already been cut after the Autumn Statement last November from 12 per cent to ten per cent for employees, coming into force in January.
How much will people save after Hunt’s cuts?
In isolation, Hunt’s move saves someone earning between £12,570 and £50,270 around £450 a year. Those earning £50,270 or more, will save a total of £754 a year.
For those employed, with the rate cut to 8 per cent, on £25,000, they will save £248.60 a year while those on £35,000 will save £448.60.
Employees on £50,000 will save £748.60 while anyone on £75,000 to £150,000 will save £1,508.
For those who are self employed and earning £25,000, they will save £124.30 with the rate cut from 8 to 7 per cent, while this goes up to £224.30 for those on £35,000.
For people on £50,000 they will save £374.40 and any earners on £75,000 to £150,000 is £377.
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How does national insurance differ from income tax?
The government uses NI contributions to pay for benefits, such as the state pension, and help fund the NHS.
The rates apply across the UK. People will start paying NI when they turn 16 and earn over £242 a week or have profits of more than £12,570 a year.
It is not paid by people over state pension age, even if they are working.
Eligibility for some benefits depends on the NI contributions you make across your working life.
Meanwhile, income tax paid on your income. You do not have to pay tax on all types of income.
It’s used to help provide funding for public services. For example, it will also go towards the NHS but also education and the welfare system, as well as investment in public projects, such as roads, rail and housing.
Will NI be abolished and what would that mean?
After Hunt spent £10bn to cut national insurance by 2p, after doing the same in September, he indicated that the Government’s eventual ambition is to scrap the tax entirely. Some Tory MPs now believe the Conservative Party is planning to make scrapping NI an election manifesto commitment.
However, Ashley Webb, economist with Capital Economics, said it would not be viable for the Government to cut NI entirely without raising other taxes.
He said that if there is a long-term ambition to cut NI, it would need to be accompanied by raising income tax – or merge the two.
“If they cut it overnight they would end up with a giant black hole in their books. The only way to do it is by increasing taxes elsewhere, lower spending substantially or the UK economy needs to start growing at a higher pace,” he said.
Asked how he would pay for abolishing national insurance, Hunt told Sky News: “We’re not saying that this is going to happen anytime soon, and indeed that’s not the only way that you can end that unfairness of taxing work: you can merge income tax and national insurance.”
Why do pensioners not pay national contributions?
Pensioners do not have to pay national insurance contributions.
Tom Selby, of online investment platform and stockbroker service, AJ Bell, said there is no real reason why pensioners don’t pay this tax.
He said: “Given NI is essentially just another tax on incomes, with the money used to fund services for all, there is an argument for applying it to people of all ages.”
Rob Holdsworth, of the Resolution Foundation, added: “There is no real justification for excluding pensioners. But applying it would be a tax on pensioners so no-one has tried to do it.”
How does national insurance affect the state pension?
You need 35 years of full contributions to qualify for the full state pension.
Every year you miss out, your pension is reduced by one 35th, so one missing year reduces your weekly payout. But once you have made 35 years of contributions you don’t accrue any extra pension, which is a source of discontent for people who have worked from when they were young to pension age.
