Don’t exempt Indian workers from NI, abolish it altogether
The row over Indian visas is really a sign of how misleading and poorly-understood the tax system is, says John Oxley
The row over National Insurance exemptions for Indian workers shows the difficulty the government has in balancing trade deals with concerns about immigration. It also points to the confusions which abound around National Insurance and, ultimately, why it is time to give that tax the boot.
Really, exempting Indian secondees shouldn’t be that controversial. We already have similar deals in place with other countries. While it may make them slightly cheaper to employ than local workers, the numbers are limited. Most of all, it is likely to end up costing the Treasury more money than the alternative.
National Insurance is a funny tax. Originally intended, as the name suggests, as a form of social insurance, the proceeds are now wrapped up into the general Treasury pot. But the payments differ from other taxes, as they qualify you for some of the benefits they theoretically pay for. Maintaining this distinction drives a number of troublesome issues.
For foreign workers, each year they pay it accrues towards a pension entitlement. That might not seem like a big deal, but they can also buy extra years from the Treasury, generally for less than what they would receive back. Earlier this year, social media was awash with stories of Australians who had spent a few years in London buying themselves a full entitlement on the cheap. Opening this up to more people who have only spent a few years here could prove very costly.
Beyond that, NI remains poorly understood. People often visualise it as akin to an investment fund, with their payment amounting to an “entitlement”. “I’ve paid in all my life” is a regular refrain when it comes to things like pensions. This is highly misleading because although NI brings an entitlement, the money goes out the door on today’s spending, and future payments will come from tomorrow’s taxes. Paying in today doesn’t guarantee anything will be there in the future. Historically, most people have paid in less than they end up taking out of the system.
NI should be rolled into income tax
Treating it as separate from a general income tax also creates unfairness. Since it is only paid on earned income, it skews taxes towards workers and away from people who take income as dividends or receive it from property. Since it is no longer levied on people who have reached state pension age, it also penalises younger workers at the expense of the old. The lower threshold for when you start paying it means it also hits the lowest-earning workers way more than income tax.
Taxation should be as simple as possible. National Insurance fails this basic test, as the confusion about exemptions for seconded workers shows. The average voter finds it hard to understand how NI works and what it is used for. The confusion creates all manner of political issues, especially around entitlements to the state pension and changes the government might want to make to it. Abolishing it would be the easiest way to fix these issues.
It makes little sense to have different taxes for different types of income, kicking in at different thresholds and affecting people differently. Rolling NI into income tax would greatly simplify this and the public’s understanding of how it all works. NI does not operate as a social insurance system, so there is no sense in describing it that way, or operating bits of it as though it does.
Abolishing NI would allow us to have a better discussion of how tax is raised and spent. It would avoid silly issues like the Indian visa row. It might even give the government a chance to cut taxes for a good chunk of people. If we want the government to be straightforward and better focused, it is time to get rid of the outdated distinction between income tax and NI.
John Oxley is a political commentator