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Carl Emerson of the Institute for Fiscal Studies
explains National Insurance
 real 28k

Tuesday, 22 May, 2001, 17:00 GMT 18:00 UK
Q&A: National Insurance contributions

National Insurance taxes have moved to the centre of the election debate in the UK. But how does the contribution system work and who pays? BBC News Online explains the facts behind the issue.

What is National Insurance?

National Insurance (NI) is a tax people pay on their wages. In return they are entitled to certain benefits like the state pension, jobseekers allowance (once known as unemployment benefit) and maternity pay.

It is payable at 10% of income, for any income between 87 and a maximum of 575 per week (29,900 per year).

NI was introduced in 1948, as a key part of the welfare state, to ensure that people had protection against poverty when they became old or sick.

However, the value of many of the benefits provided has been reduced over time.

Employers also pay NI contributions, complementing the contributions levied on their employees.

People with their own pensions pay a slightly lower, so-called contracted-out rate.

How much does the government raise from NI?

In the most recent financial year, the government received 60bn in NI taxes - more than 15% of all government tax revenues.

That is more than it raised from VAT, and more than half the amount raised from income tax.

Like income tax, the amount collected by the government has risen sharply in recent years, helping to boost the government's budget surplus.

Although people only become eligible for contributory benefits by paying NI, in fact at any given time the government may run a surplus or deficit on the NI account (and the extra revenue is then spent on other government programmes, or the deficit made up from general tax revenues.)

Why has NI become a political issue?

The Conservatives say that Labour has a secret agenda to raise NI contribution levels, either by raising the rate of tax or by extending the upper limit at which NI is payable.

They claim that if Labour abolished the upper earnings limit, it would affect some four million taxpayers, costing them 800 each.

The Conservatives argue that Labour needs to raise more taxes to fund its plans to expand public services in the last two years of the next Parliament.

The Tories also say that Labour plans to target the middle classes to pay for it.

Is the charge plausible?

During the past two election campaigns, National Insurance was also a political issue.

In 1992 Labour planned to raise NI levels to fund increases in the state pension, leading to charges about a "Labour tax bombshell."

In 1997 Labour ruled out increases in the upper limit to NI as well as pledging not to raise the basic and upper rate of tax - and kept to it.

This time, however, Chancellor Gordon Brown has refused to rule out changes to NI rates or levels.

In the past two years Labour has raised the upper earnings limit on NI faster than the rate of inflation. However, it has also raised the lower earnings limit, sparing one million poorer people from paying the NI tax.

And the tax changes made by Labour during the past Parliament have broadly been redistributive, benefiting the poorest households most.

However, Prime Minister Tony Blair has made it clear that Labour recognises the importance of maintaining incentives for high earners.

Would changes to NI limits be a good idea?

Many tax experts believe that the earnings thresholds set for National Insurance contributions and income tax should be more closely aligned.

At the moment, people earning between 29,990 and 33,935 (the level at which higher rate tax begins) pay a rate of 22% for this part of their income. All income below this band is taxed at 32%, and all income above is taxed at 40%.

If a government raised the upper limit for NI contributions to the level where the higher tax rate starts, it would boost tax revenues by around 1.1bn.

However, people earning more than 29,990 would have to pay more - on average about 300 a year.


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