Last month, the government voted in favour of increasing national insurance contributions by 1.25 percentage points. This led to the breaking of their manifesto commitment in 2019 of not increasing national insurance. The main criticism of this decision is that the tax rise will predominantly burden the working class, particularly those on low incomes, while having a minimal effect on the wealthiest in society.
The government has argued that such a rise was necessary, as due to the pandemic, the NHS and the social care sector will require increased funding. Hence, they have said that the tax rise will raise £36 billion in three years, with the money firstly being directed towards the NHS and then towards social care.
However, this is not the particular issue. The government attempted to frame the debate as an argument over whether or not the health service and the social care sector should receive increased funding. Yet, many critics of Conservative party policy have consistently argued for larger increases in real-terms spending in these areas, but have been faced with resistance from successive governments. The Royal College of Physicians called for increasing spending in 2016 after stating that the NHS is “under-funded, under-doctored and overstretched”.
Rather than the debate being over increased funding, the issue at hand is over how this money will be raised.
Currently, national insurance covers a wider part of the workforce than other taxes such as income tax. This is because national insurance is paid once a person has earned over £9,568 (or £6,515 for the self-employed), rather than £12,571 which is the first bracket for income tax payments. Therefore, this tax increase will affect more workers, particularly those on lower incomes. The rise is expected to hit around 29 million people.
For a person earning £20,000 a year, their national insurance contributions are expected to rise by £130. Although this may seem minimal to some, it must be acknowledged that this tax rise will further contribute to the in-work poverty which many are already facing.
A report by the Institute for Public Policy Research found that between 2019 and 2020, most people living in poverty were in some form of paid work. Evidently, being in work does not guarantee that you will not be in poverty.
In addition, the government has decided to cut the £20 uplift of universal credit payments, leaving the most vulnerable in our society over £1000 a year worse off. Citizen’s Advice has estimated that 38% of those receiving universal credit are in work, while 16% of claimants are under 25. Thus, working people, particularly those in poverty, will be hit the hardest by this tax rise and through cuts in their welfare support.
Another argument is that the upcoming tax rise is inherently unjust as it is a form of regressive taxation. This is because, with earnings over £50,000, national insurance contributions plummet to 2% (or 3.25% to account for the upcoming rise). Former Prime Minister John Major argued against the rise on this basis. Here, it is evident that the incomes of the most wealthy in society are being protected by the government.
Tax rises on the working classes will be unsustainable in the long term. This is because the UK has an ageing population, meaning that more funding will be required for health and social care to accommodate them. However, with a reduced workforce and consequently a reduction in the number of taxpayers, there will be significant issues over how to fund our most essential services.
Therefore, rather than taxing those on a lower income, the focus should shift onto increased taxation for the wealthiest in society, such as those that have accumulated high-value assets or that have gained vast amounts of wealth from capital growth.
There is a range of fairer options to raise funds that must be considered. According to the Intergenerational Foundation, £24 billion a year could be raised by charging national insurance contributions onto “shareholder dividends and on commercial and private sector rents”. Or, as some left-wing MPs from Labour have suggested, a wealth tax could be levied on the wealthiest individuals in society.
However, the government will resist any calls to raise taxes on the wealthy. The explanation is simple: such a tax rise would isolate older, wealthier voters that lean heavily towards supporting the Conservatives.
Therefore, this upcoming tax rise was a political choice that aims to protect the interests of key Conservative voters at the expense of the working classes. I completely agree that the NHS and social care requires a significant increase in funding, however, raising national insurance contributions on the less economically advantaged, especially during a pandemic, is not the way to pursue this. Fairer and more just alternatives are possible.