Partner Article

National Insurance – should you get what you pay for?

A report recently published by the think-tank CentreForum has pointed out what so many already knew - that the self-employed pay less in NI contributions than their employed counterparts.

Is this a distorting subsidy by one working group of another, or is it simply a governmental policy choice? Worse, might it be the unintended consequence of repeated tweaks and changes to the tax system that sits, like an elephant in the room, because there is no appetite to change it?

If NICs are social insurance – and that is how our network of reciprocal agreements with other States treats them, then it is easier to accept that the amount of payment into the fund need bear no relation to the individual’s benefits from the fund. On the other hand, if NICs are no more than an additional income tax, why are they still structured with such distorting effect? Is there any reason that a senior LLP member pays contributions at a maximum rate of 9% with no employer’s contributions at all, whereas an employee of that LLP pays 12% instead of 9% and a 13.8%, uncapped, employer’s contributions is paid as well? No wonder there has been perceived misuse of LLPs and other business structures when there are inexplicable financial incentives to operate in a particular way.

We take for granted that income tax is paid on gross income rather than net. I never did explain this principle to the satisfaction of an elderly Yorkshire farmer who couldn’t find a deduction for his coals on his tax return. But why do we accept the employed v self-employed distortion?

If the rates, and base, of NICs were harmonised between the employed and the self-employed, there would be no need for most of the tax status cases or HMRC’s status officers. The legislation and compliance activity surrounding IR35 could be abolished (with some attention to the dividend issue: NICs on private company dividends?) and the number of classes of NICs could be reduced.

Now there’s a thought…

This was posted in Bdaily's Members' News section by Baker Tilly .