Budget 2014: New tax to replace National Insurance proposedParliamentary move urges greater tax transparency

26 February 2014


A Conservative MP has suggested that government should rename National Insurance to an 'earnings tax' and eventually merge it with income tax.

Currently, you pay income tax, at different levels depending on your how much income you receive, and National Insurance on your earnings. 

In a 10-minute rule bill in the Houses of Parliament on 25 February, Ben Gummer, MP for Ipswich, said, 'National insurance is now a tax. It has all the features of a tax. Money paid in this financial year in national insurance contributions is used to pay this year’s costs of pensions, health care and much else besides. The surplus in the national insurance fund is transferred to other Government spending.'

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New 'earnings tax' proposed

Calling for National insurance to be renamed,  Mr Gummer said, 'I propose we call it earnings tax, because it is a tax on earnings, but we could equally call it additional income tax, or employment tax. Such a change would have no impact on people’s current entitlement or on the rates at which NI is currently charged. It would, however, be an important first step in the merging of income and earnings taxes.'

Although Mr Gummer's bill is unlikely to proceed, the Chancellor, George Osborne, has been reported as being 'attracted to the idea', so it may resurface with government backing at a later date, and even merit a mention in the Budget on 19 March. 

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National insurance contributions

National Insurance is currently levied on earnings above a certain threshold (£7,956 in 2014/15). It is paid by employers, employees and the self-employed. 

Most employees make Class I National Insurance contributions on their eligible earnings at 12%. Those who are still 'contracted out' of additional state pension make contributions at a 10.6%. Earnings above the upper earnings limit (£41,865 in 2014/15) have 2% deducted.    

The self-employed make flat-rate Class II National Insurance contributions and Class IV National Insurance contributions (paid at 9%) if their profits are above a certain level (£7,956 in 2014-15).  

People who reach state pension age (currently 65 for men and 62 for women) stop paying National Insurance altogether. 

Go further: National Insurance explained - read our in-depth guide to find out more

State pension entitlement

Paying National Insurance builds up entitlement to a number of benefits, including state pension. To get full basic state pension (£113.10 in 2014/15), you need to have been credited with at least 30 years' worth of National Insurance contributions. 

In 2016, this requirement is due to change to 35 years' worth of National Insurance contributions, to gain entitlement to the new single-tier, 'flat-rate' state pension.

The government has recently announced that existing pensioners will be able to top-up their state pension entitlement after 2016 by making voluntary Class 3A National Insurance contributions. The cost of this may be revealed by the Chancellor in the Budget.  

Paying National Insurance also builds entitlement to Jobseekers Allowance, Maternity Allowance, Bereavement Allowance, Bereavement Payment and Widowed Parent's Allowance.

Go further: State pension explained - discover more information about the state pension

HMRC top revenue sources

Income tax is the single largest source of government revenue. In 2012/13 it raised £152bn. National Insurance is the second largest revenue earner for HMRC. In 2012/13 it contributed £102bn.

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