Before he unveiled his main tax cut in the 2024 budget this week, Jeremy Hunt criticised the fact that Britain collects two different types of taxes on earnings: income tax and national insurance contributions (NICs). The system has become too complicated, the chancellor said. It penalises work, he added, thus deterring a high-wage, high-skill economy. He then announced a cut in employees’ NICs by a further 2p, and ended: “Our long-term ambition is to end this unfairness … we will continue to cut national insurance.”
Britain’s tax system is indisputably complicated. The case for clarifying it as far as possible is overwhelming, in part so that it can do the job required in today’s conditions, but also so that it can command the robust public support it demands, especially in populist times. But Mr Hunt is very wrong to caricature NICs as a penalising or reactionary tax. In many ways, NICs are the very opposite.
One problem with the reputation of NICs today is that they have been radically transformed over the years from what was originally intended when they were introduced by David Lloyd George in 1911. Back then, NICs were less a tax on work than the foundation of the first British welfare state. They paid for health insurance for all wage earners and for unemployment relief in vulnerable industries. Then, as now, the tax was shared between employees, employers and the state, allowing Lloyd George to sell the scheme to workers as “ninepence for fourpence”. In 1911, this very column welcomed the National Insurance Act as “the greatest measure in our time both of public health and of social justice”.
NICs were the rock on which the later Beveridge report and the National Health Service were built. But they have been subjected to countless changes over the years. The link between what you pay in NICs and the things to which you are entitled – including healthcare, benefits and the state pension, which was integral to the original system – has been severed. As Paul Johnson of the Institute for Fiscal Studies says in his book Follow the Money, NICs have evolved from an explicit social contract into a tax on earnings.
Nevertheless, even today, the shared responsibility for paying NICs still represents the foundational, and to many people almost sacred, principle of the welfare state. NICs embody the selfsame core ethos of the NHS – now being celebrated in the National Theatre’s new “Nye” production – that there should not be one system for the rich and a lesser system for the poor. That is why the “N” in NHS and NICs matters. It articulates a nation that likes the ties that bind and does not wish to loosen them so thoughtlessly.
This is not something to throw aside lightly. While income tax is based on the need for redistribution, NICs are based on the need for solidarity across class, age and gender. The two taxes may overlap, but they derive from different principles. This is not an argument for maintaining NICs untouched, or for returning to the system set out by Lloyd George. But it is an argument for ministers to make the moral case for taxation far more strongly and to construct a national tax system which embodies that national solidarity. To dismiss NICs as inherently unfair is a travesty of the truth. NICs were Britain’s foundational fair tax. If they are to be retired, then at the very least they deserve retirement with honour, and successors that are worthy of them.
