The government should lower the employer element of the forthcoming Health and Social Care Levy and cut the rate of employers’ national insurance contributions in order to aid post-Covid economic growth and reward effort and enterprise.
This is according to a report from “liberal conservative” think-tank Bright Blue, which found that the government should offset a potential reduction in the level of taxation on work by increasing the overall taxation on wealth.
From 1 April 2022, employers, employees and the self-employed will pay an additional 1.25 pence in the pound on top of the national insurance contributions (NICs) they already pay, which government has said will go directly to supporting the NHS and social care bodies.
This means an employee with a £20,000 annual salary will pay an extra £89 in tax, whereas someone on £50,000 will pay £464 more.
From April 2023 onwards, NICs will reduce to 2021-2022 tax year levels and will be replaced by a new 1.25% Health and Social Care (HSC) Levy, the revenue from which will be ringfenced and used to fund UK health and social care bodies.
The government has come under increasing pressure to cancel the planned NICs rise, with critics suggesting it would have a significant impact on the lower paid. However, writing in the Sunday Times at the weekend, Boris Johnson and chancellor Rishi Sunak said the increase “must go ahead”, stating “there is no magic money tree”.
Bright Blue’s Rightfully rewarded report notes that the HSC Levy and NICs increases cannot be abolished, but can be made much fairer by instead increasing taxation on individual’s wealth, which is often derived from “luck and inheritance”.
“Though the public finances need to be repaired in the wake of the pandemic, simply squeezing more money out of the tax system without improving its design would be a mistake,” said Sam Robinson, senior researcher at Bright Blue.
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“The government should not pass up the opportunity to recalibrate the tax system to better reward work and effort while responding to the rising importance of wealth and inheritance in life outcomes.”
Chief executive Ryan Shorthouse said: “A centre-right government that is committed to ‘levelling up’ the UK should rebalance the tax system from income associated with work and effort and onto income associated with privilege and luck.”
The report suggests that the government considers lowering the rate of the employer element of the HSC Levy and cutting the rate of employers’ NICs if public finances allow.
It says this might result in increased employment, higher wages among employees and reduced overhead costs for businesses in the long-term.
Other recommendations made in the report include:
- Broadening the HSC Levy to apply to pensions and rental income
- Ending the exemption from class 1, 2 and 4 NICs for those working above the state pension age
- Reforming the capital gains tax regime
- Replacing inheritance tax with a lifetime receipts tax, moving back to the system that applied before 1986.
Dame Margaret Hodge MP, chair of the Public Accounts Committee, said the recommendations are “a step in the right direction towards a fairer and more sustainable model for funding our creaking social care system”.
“The government’s new levy on national insurance contributions is one of the least equitable options for raising the necessary resources. Whilst I would advocate for even more radical reform, these new recommendations will rightly open up debate on how we could fairly taxing income from wealth as well as work,” she said.
Research commissioned by the Liberal Democrats found that the NI rise will hit small businesses hard, and cost the average business employing up to nine people more than £1,000 extra a year.
Lib Dem leader Ed Davey said: “The Conservatives’ broken promise is a manifesto betrayal, dropping a tax bombshell on small businesses that are the backbone of our communities, high streets and local economies.
“We have already lost far too many treasured shops from our high streets, and too many businesses are already drowning in tax rises and red tape.
“The Conservatives must give entrepreneurs the chance to grow again instead of clobbering them with this crippling tax rise.”
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The rise in NICs comes the same day that the national living wage increases 6.6% to £9.50 per hour.
