National insurance contributions: Going, going, gone?

Before the UK general election in July 2024, the Conservative government cut national insurance (NI) contribution rates for employees and the self-employed (twice). More radically, it announced a longer-term intention to abolish these contributions entirely, leaving the future of NI benefits unclear. But this was against a backdrop of a chronic lack of well-informed debate about the NI system and social security generally in the UK. Fran Bennett tries to put this right.

In his 2023 Autumn Statement, then‐chancellor Jeremy Hunt announced cuts in the main rate of national insurance contributions (NICs) for employees from 12 to 10 per cent from January 2024, and for the self‐employed from 9 to 8 per cent in April 2024. In the Spring 2024 Budget he announced further cuts from April 2024 for employees from 10 to 8 per cent, and for the self‐employed from 8 to 6 per cent.1 In addition, the then‐government announced there would be a consultation on abolishing flat‐rate contributions for most self‐employed people.2

The Office for Budget Responsibility estimated that the first cuts would mean foregone revenue of £9.4 billion in 2024/25, rising to £10 billion by 2028/29,3 and the second would amount to £9.4 billion in 2024/25, with an average cost over five years of £10.3 billion annually.4 It did not escape notice that these sums came very close to the £20 [22] billion ‘black hole’ the new Labour chancellor said she discovered on taking office.5 But she was not expected to reverse these cuts, because the Labour manifesto had promised: ‘we will not increase National Insurance’.6

Confusion about contributory system

Jeremy Hunt also announced in the Spring 2024 Budget the then‐government’s longer‐term ambition to abolish NICs altogether for employees and self‐employed people (though not for employers), when conditions were right, to end the ‘double taxation of work’ and create a ‘simpler, fairer tax system that makes work pay’.7 There was some lack of clarity about ‘longer‐term’, as well as the implications for contributory benefits like the state pension, contribution‐based (new‐style) jobseeker's allowance and contribution‐based (new‐style) employment and support allowance, for which people qualify via NICs. A small number of Conservatives also expressed concern, because NICs are relatively popular and seen as funding the most valued parts of the welfare state,8 and because the government should decide what it wanted to do with the contributory principle.9 But most of the debate ignored the implications for contributory benefits, and when this was raised it was in relation to pensions rather than including working‐age benefits.

Written parliamentary answers suggested that ‘the money raised by NICs does not determine the amount going to… pensions’.10 The National Insurance Fund’s accounting officer suggested instead that ‘in setting contribution rates, HM Treasury Ministers are required to consider changes in… earnings, the balance on the Fund and payments expected to be made from it in the future’.11 Other written answers avoided the issue of the implications for contributory benefits if NICs for employees and the self‐employed were abolished.12 However, there seemed to be some confusion, with the secretary of state for work and pensions saying pensions are paid for out of general taxation13 but the financial secretary to the Treasury describing them as contributory benefits.14

National insurance contributions: just another tax?

Discussion about NICs often seems to see them as just another tax.15 NICs are viewed through an economic rather than a social policy or political economy lens. Their function in funding social insurance, in binding society together, may be ignored. As Alistair Carmichael MP said, however:16

‘NI is identifiably different from the other taxes we pay. More than any other levy, it is the symbol of our shared obligations – what we owe each other as a society and as communities in support throughout our lives. The point of NI is that we pool and share resources geographically and generationally.’

So why are NICs often seen as just another tax? Firstly, some see little connection between what an individual pays in and gets out.17 This may relate to the abolition of earnings‐related benefits; even the state pension has been only flat rate since 2016. However, social insurance is not only individual savings – although for pensions especially it is partly this. It is also about risk pooling. Indeed, it can combine self‐insurance, solidarity with others and altruism in a way means‐tested benefits alone cannot.

And because it is social insurance, society can decide – as in the UK – that those who are unemployed or ill and unable to work, or caring for others, can be credited in, without paying contributions.18 A zero rate of NICs for many low‐paid workers has also been set recently. And qualifying for maternity allowance is now a matter of earnings not contributions. Thus, rather than actuarial insurance, a scheme’s inclusivity is decided by the political community organising it as a social contract (as suggested to the Institute for Fiscal Studies’ Deaton review of inequalities).19

Secondly, some argue that NICs are not hypothecated. Dan Neidle of think tank Tax Policy Associates says: ‘NI is a fiction to which many people cling’.20 Hypothecation – allocating some or all revenue from a tax for a specific purpose – is one means of forging a closer relationship between citizens and tax‐funded services.21 In fact receipts paid into the National Insurance Fund,22 comprising NICs paid by employees, employers and the self‐employed (apart from some set aside for the NHS), ‘are kept separate from all other revenue raised by national taxes and are used to pay social security benefits such as contributory benefits and the state pension’.23 While reserves can be lent to governments, the Fund has no borrowing powers and cannot be spent on anything other than NI benefits without parliamentary permission.24 NICs must be debated separately from Finance Bills covering other tax matters. They are not devolved, unlike some income tax measures.

Thirdly, what about the Fund being pay as you go, rather than being invested? This is true. But at least one‐sixth of likely annual benefit expenditure is kept as a working balance. If funding will be insufficient, a top‐up grant can be paid from general taxation (limited to a maximum 17 per cent of expected benefit expenditure). The Government Actuary’s Department also reports regularly on the Fund and carries out a five‐yearly review (the most recent in 2020).25

As noted, the NIC cuts, and abolition plans, were justified by arguing that NICs represent ‘double taxation of work’. NICs are payable on working‐age earnings and profits from self‐employment, but not other incomes. But they pay for benefits for interruptions or cessations of employment. (Employers also pay NICs, although in recent years an ‘employment allowance’ has reduced these, at first for all and then for smaller employers.) When self‐employed people gained access to the new, higher, state pension, they were due to pay more in NICs – although this measure was reversed.26 Conversely, when an additional levy was proposed in 2021 to provide more for health and then social care, this would have extended to some other incomes as it was unrelated to employment, but it was abolished under Liz Truss.27

Issues worth debating

Some comments above are symptomatic of a lack of well‐informed debate about the NI system and social security as a whole. Perhaps the mass means‐testing juggernaut, universal credit (UC),28 has exacerbated the paucity of wider discussions – for example, about the purposes and principles of social security; how people should qualify for benefits; whether the benefit unit should be individual or family; and what balance there should be between different benefits, including contributory. CPAG investigated these and other issues for children and families several years ago.29 But the current Labour secretary of state’s suggestion that the Department for Work and Pensions should focus on work more than benefits does not indicate a revival of wider debate.30

Rather than discussing cutting or abolishing NICs, there are some policy issues worth debating in relation to NICs and NI benefits. Contributory benefits can strengthen a sense of ownership or stakeholding, but when does this create insider/ outsider divisions? And is crediting in some groups sufficient to counter this? These benefits are based on the individual, helping women especially to have independent income,31 but this is also true of non‐contributory non‐means‐tested benefits, such as carer’s allowance. And the sense of ownership of contributory benefits has clearly not protected working‐age benefits against significant cuts, so what is their added value?

In addition, as noted, NI benefits are for periods out of paid work, but how do we value unpaid work? And with today’s flexible labour market, should greater priority be placed on precarity and poverty in work? How can contributory benefits work for people with zero‐hours contracts or multiple jobs? One irony is that there was previously more flexibility. You could receive three‐quarters of the full benefit if your contributions were insufficient. And if you worked part time each week, benefits covered just the days you worked.32 But, as employment became more flexible, NI benefits became less so.

On introducing UC, the then‐government took legislative powers to abolish working‐age NI benefits;33 but it could not do so, because of existing international agreements. In the Covid pandemic, the furlough scheme had to be invented, because the UK had no earnings‐related unemployment or sickness benefit left. When think tanks and others reflected on the pandemic’s lessons, several34 suggested reintroducing at least short‐term earnings‐related provision for unemployment. Do we want to be more like our European neighbours in benefit provision, despite Brexit?

Directions of travel

Some general directions of travel are proposed here in relation to NICs. First, we should stop cutting NICs. The UK raises less than other countries from social security contributions.35 One paradox is that NICs are relatively popular, including with Conservative voters: before the 2024 Spring Budget, fewer than a third thought NICs too high.36 And the contributory principle was popular with citizens’ juries convened by the Fabian Society37 and CPAG38 in recent years. Indeed, there is a case for reversing the NICs cuts, especially given their impact on the National Insurance Fund’s finances, and (as previous governments proposed) for increasing NICs for self‐employed people and adding a broader levy for social care. NICs are not calculated on cumulative earnings as income tax is, and if you work more than one job there is a threshold per job before starting to pay NICs. To help those with several jobs, the Resolution Foundation has suggested a per person (rather than per job), annualised basis for NICs.39

We should also stop seeing NICs as just another tax. Although NICs and income tax have been aligned in some ways in recent years,40 the differences are clear – and could be made clearer.41 The case for the upper earnings limit (with a lower rate of NICs on higher earnings) was that only a slice of earnings was insured and earnings‐related benefits were limited; the case for increasing this is trickier when even the pension is flat rate. There is an argument for equalising the tax treatment of earnings and other income. However, instead of cutting NICs, an ‘investment income surcharge’ could be levied on income other than earnings, as previously.

In addition, governments should be much more proactive in communicating with people about their NICs and how they are used – including by revising the ‘annual tax summary’.42 Many people do not understand how the NI system works. If they did, there might be a more constructive, clearer debate about not just NICs and NI benefits but the whole UK social security system.