National insurance hurts the employee, it is time for reform

April 30, 2015 12:35 PM

Employment Allowance allows businesses to reduce its national insurance contributions by up to £2,000 and figures today show that this has been very popular

In total, 1,117,000 businesses have taken up the scheme, an estimated take up rate of 89 per cent. Northern Ireland has the lowest estimated take up rate of 84 per cent, and Yorkshire and the Humber the highest at 95 per cent.

The sectors which have benefitted the most are wholesale and retail trade and Vehicle repair (230,000 businesses), professional, scientific and technical activities (197,000 businesses) and construction (138,000 businesses).

Clearly, reducing the tax burden has been welcomed with open arms.

This is important because a business is just an agreement written on pieces of paper stored at Companies House. It is employees and shareholders that pay tax.

National insurance contributions are effectively paid by the employee. There is considerable literature (referenced in The Single Income Tax) that shows that up to 90 per cent of the additional cost to the employer could otherwise be paid to the employee.  Or, where the additional cost is too great, it prevents people being employed at all.

March’s ONS labour market statistics show that businesses have employed more than 500,000 year-on-year. Certainly this is not exclusively due to the Employment Allowance, but it is does contribute to a job creating environment.

That said, the TPA argues against further complications and additions to the UK’s regulatory and tax codes, which the Employment Allowance indisputably is. The next government should take the TPA’s advice and implement a single income tax which does away with national insurance altogether. Or even raising thresholds or halving the rates would be a significant improvement.

Tax changes should aim to simplify the tax system, leave more money in people’s pockets and line the path to employment. The Employment Allowance achieves the latter two, and it is not sensible to make the great the enemy of the good. But more can be achieved with fundamental reform in the place of minor tinkering.

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