National Insurance Contributions – an outdated system?

John Smith-Daye, Accountant, Essex, MaldonPosted by John Smith-Daye:

National Insurance began its life in the National Insurance Act of 1911, which introduced the concept of benefits based on contributions paid by employed persons and their employer. Originally, two schemes ran side by side, being one for health and pension benefits, and the other for unemployment benefit.

Historically, payment of NI has been referred to as “paying the stamp” or “stamping your card”, as indeed this was the way to keep your contributions up to date, by buying a stamp and sticking it on a card to record the fact of compliance.

Following the founding of the National Health Service by the Labour Government in the late 1940s, major reforms took place to the funding and operation of state welfare offerings. For a time, National Insurance was referred to as “NHI”, being National Health Insurance, with the thought being that the contributions made would be directed into the provision of services which were free at the point of use (e.g. doctors, dentists and opticians). As time progressed, the nature of the beast changed, and by the mid 1970s the acronym had become “NIC”, and the destination of the funds widened to include the thought of paying into a pot from which people could draw their future State Pensions.  This progressed into current payers paying into a pot for current pensioners, and eventually (in the opinion of the Author anyway) this pot has just become part of the overall pot administered by the Government, alongside taxation in general.

Recent developments of the system have meant that NI provides a significant part of the Government’s revenue   - currently believed to be in excess of 20%. As the system has developed, the link between individual contributions and benefits has been weakened. Less than half of benefit expenditure is now distributed based through contributory benefits, compared with more than 65% in 1978/79 – partially due to the growth of means-tested benefits since the late 1970s.

There is no doubting that the system has become more “sophisticated” over its life so far – some would say “complicated” rather than “sophisticated”. Although there are currently four main Classes of NI (known quite simply as Classes 1, 2, 3 and4), there are several sub-divisions, and quite a few strange anomalies. For example, Class 3A – if you had reached State Retirement Age prior to 6th April 2016, it would have been possible between 12th October 2015 and 5th April 2017 to enhance your future weekly pension by £1 for a one-off payment of £890 – up to a maximum further contribution to fund an extra £25 a week. This one-off payment reduced to £127 per £1 of pension for those aged 100 – how ridiculous is that!

The Office of Tax Simplification, formed in 2010, is an independent office of HM Treasury which was tasked with looking at reducing the complexities in the tax system for both businesses and for individual taxpayers. They published a paper in March 2016 entitled “The Closer Alignment of Income Tax and National Insurance”, which in the Author’s opinion can only lead to sensible results. Successive Governments in recent years have strived to keep the “Basic Rate” of income tax low – but this has the consequence of affecting other taxes and methods of raising funds for the national spend, as the overall need does not reduce drastically as time progresses.

This paper can be found using the following link, and makes for interesting reading:-

The Office of Tax Simplification - The Closer Alignment of Income Tax and National Insurance

February 2018

Disclaimer

The views expressed in this article are the personal views of the Author and other professionals may express different views. They may not be the views of Lambert Chapman LLP. The material in the article cannot and should not be considered as exhaustive. Professional advice should be sought in connection with any of the issues contained in the article and the implementation of any actions.

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