National Insurance 'is Trojan horse for tax rises and should be axed'

NATIONAL Insurance should be abolished when the government's proposed universal state pension is introduced, a leading think-tank has claimed.

The NI system has been abused by governments and is "riddled with anomalies, complexity and a lack of cohesion", according to a report published yesterday by the Centre for Policy Studies.

It called for the system to be scrapped if the government pushes through its plans to replace the current system of state pension contributions with a single universal pension of around 140 per week, with no means testing.

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Currently, most workers pay 11 per cent of annual earnings between 5,720 and 43,888 a year, after which a 1 per cent rate kicks in, and the number of years of contributions is the basis for the state pension.

But the report argued that because the amount received under the universal state pension would not be based on NI, the system could no longer be justified.

It claimed that the NI system, originally set up to pay for state security benefits such as pensions, had become a way for successive governments to disguise tax increases and divert funds to other purposes.

It said that when incapacity benefit is phased out the NI system would pay for just 6 per cent of benefits.

The report instead recommended that NI is merged with income tax to create a simplified payroll tax, albeit only once economic conditions had improved.

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David Martin, author of the report, said the system penalised those most cautious with their money and meant the lower paid were likely to suffer a much greater loss from NI contributions than from income tax.

But he admitted that while merging National Insurance with income tax would reduce the overall amount of tax that people had to pay, it would be a difficult change to push through politically because it would mean an increase in the headline rate of income tax.

Jill Kirby, director of the Centre for Policy Studies, said: "The merger of tax and National Insurance would lead to a much higher headline rate of tax.

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"Such a step would provide a simpler, more transparent and more honest approach to taxation. Politicians wishing to raise taxes would no longer be able to hide behind the device of raising National Insurance rates."

John Lawson, head of pensions policy at Standard Life, said: "The biggest consideration would be about how it is presented to the public and whether the government is prepared to remove the link between NI and the health service and other schemes.It is similar to the argument here in Scotland over replacing council tax with a local income tax."

But Ronnie Ludwig, a partner at accountants Saffery Champness in Edinburgh, said scrapping NI would be perceived as a stealth tax.

"Coming hard on the heels of frozen tax reliefs and tax rate bands, not to mention the new top tax rate of 50 per cent, this would be a very difficult changefor the public to accept in a positive context," Mr Ludwig said.

Older workers planning to move overseas in retirement would be hit particularly hard, he pointed out.

"The proposal to pay the state pension based on a residency basis will greatly upset those who have paid NI contributions all their working lives, but who are planning to live abroad in countries with a lower cost of living to try to give themselves a more comfortable lifestyle."