It has been widely reported that the government will announce an
increase in National Insurance contributions (NICs) to pay for
increased funding for health and social care. In this briefing,
we compare the effects of increasing NICs and income tax rates to
pay for social care reform.
Across the UK, increasing all rates of employee, employer and
self-employed NICs by one percentage point would raise around £10
billion a year in the medium-run (assuming employers passed the
increase in employer NICs onto workers in the form of lower
earnings); around £8½ billion of that would come from England
(relevant because spending on health and social care is
devolved). An increase of just under 1.5 percentage points in the
basic and higher rates of income tax would raise a similar
amount.
In many ways, increasing income tax and increasing NICs would
have similar effects. But there are some differences.
In both cases, slightly less than half the revenue would come
from the highest-income tenth of families; an income tax rise
would be slightly more progressive than a NICs rise because the
threshold at which it starts to be paid is higher (£12,570 in
2021–22, compared with £9,568 for employee and self-employed NICs
and £8,840 for employer NICs) and because it is also paid on some
investment income, which tends to be concentrated in the hands of
the better-off – and especially the very best-off. The fact that
NICs are not levied on income from bank accounts, dividends or
rental property means that they do not discourage saving and
investment; on the other hand, increasing NICs rates would
exacerbate the incentive for people to work through their own
company, rather than as employees, so that they could take their
income as dividends rather than salary.
An important difference is that, unlike income tax, NICs is not
levied on state or private pension income (but is levied on
employee contributions to private pensions); furthermore,
employees and the self-employed who continue working beyond the
state pension age (SPA, currently 66) do not pay NICs on their
earnings, though employer NICs is still payable. 23% of families
in England contain someone above the SPA. The chart below shows
that those families would provide 14% of the revenue from
increasing income tax rates in England, but only 1.4% of the
revenue from a NICs rise – and much even of that comes from the
earnings of those below the SPA whose partner is above it, rather
than from taxing the earnings of pensioners themselves. Only 0.3%
of the additional NICs revenue would come from taxing the incomes
of pensioners (through employer NICs), compared with 12.6% of the
additional income tax revenue.
Stuart Adam, Senior Research Economist at IFS,
said:
"There are many ways that the government could raise additional
revenue to cover the costs of social care. Choosing to increase
NICs rates would mean that just 1.4% of additional revenue came
from families that contain a pensioner - who now make up 23% of
all families. In contrast, these families would contribute 13.8%
of additional revenue if the basic and higher rates on income tax
were increased."
You can find the full briefing here on our website: https://ifs.org.uk/publications/15594
