Income tax and national insurance: How much tax do you really pay?

November 03, 2016 9:03 AM

Income tax and national insurance: How much tax do you really pay?

  • Income tax+national insurance means the 20 per cent tax rate is effectively 40.2 per cent
  • Multiple taxes on wages are needlessly complex and obscure
  • National insurance should be abolished by 2021 for a simpler and more transparent tax system
  • Plan ensures groups like pensioners are protected from paying any more tax
  • Eligibility for state pension can be assessed through income tax

Click here to read the full research

In the run up to the Autumn Statement, a new paper by the TaxPayers' Alliance puts forward a step-by-step plan to drastically simplify the tax code by merging income tax and national insurance, with a view to abolishing national insurance in 2021, building on the work of the 2020 Tax Commission as part of a broader package of tax reforms.

TPA's past campaigning on the issue includes a detailed guide showing that pensioners, the self-employed and other groups will all receive a tax cut and a video highlighting how National Insurance is a second income tax in all but name.

Merging income tax and national insurance is an idea which has received serious consideration with George Osborne reportedly coming "within a whisker" of implementing the reform in Budget 2014. The Autumn Statement is the right time to implement the policy.

Employers' national insurance and employees' national insurance are taxes on labour but in reality they serve the same purpose as income tax, which is to tax people's earnings. Running three slightly different income tax systems is a century-old relic which not only adds unnecessary complexity to the system but also makes it opaque and expensive with the sheer administrative burden both on taxpayers and the taxman.

This latest paper proposes the abolition of national insurance in three phases:

  • Transparency now - First, at this year’s Autumn Statement, a transparency phase should be announced which requires the employer charge to be printed on pay-slips and changes the name of the employee and employer charges to ‘earnings tax’ and ‘wages tax’.
  • Simplification in 2019 - Secondly, Budget 2018 should announce a simplification phase which would align national insurance rules with income tax, removing most of the differences and coming into effect from 2019.
  • Abolition in 2021 - Finally, Budget 2020 should announce the full abolition of both charges from 2021, while raising income tax, effectively merging them into a single income tax. A transitional rate for those born before 1965 would ensure nobody pays more, meaning pensioners would not be left at a disadvantage.


John O'Connell, Chief Executive of the TaxPayers' Alliance, said:

"National insurance is just another tax on earnings that hides the truth from taxpayers . Many are paying far more than they realise, blissfully unaware that their national insurance contributions are not being set aside for their retirement, but frittered away like the revenues from any other tax. There's an artificial shroud of complexity surrounding national insurance rules which place an unnecessary bureaucratic burden on employers as well as the taxman and it is high time it was abolished.

"We need a simple and transparent tax code which nurtures economic growth, not archaic rules which discourage job creation and fuel needless bureaucracy."

TPA spokesmen are available for live and pre-recorded broadcast interviews via 07795 084 113 (no texts)

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