National Insurance: a pretty odd debate
National Insurance, and the impending rise of a single percentage point, emerged as again one of the core arguments in last night’s first Prime Ministerial debate on TV.
David Cameron and Gordon Brown clashed over the issue, the Tory leader Cameron claiming top businessmen were supporting his claim that it was a tax on jobs. Brown tried to defend the rise and insisted Cameron was threatening the recovery.
I have now concluded that the terms of this debate are very odd. I asked our accounts department to do some simple sums (even a journalist could understand) so I could try to get my head around what they are arguing about.
We started with a sample salary of £35,000. The annual employer’s contribution on that, at the current rate 12.8% is £3747.87. Under the Labour policy the rate will rise to 13.8%, increasing the annual contribution to £4040.64, a difference of £292.80. The Tories have proposed increasing the threshold at which employer’s contributions are paid resulting in an annual contribution of £3889.94. An increase on the current annual contribution of £142.
Of the 1.5 million businesses in the UK, 97% have fewer than 50 employees. Among those the largest group (65% of the total) is those that have up to four staff.
Assuming they have four the annual increase in contributions is going to be around £1,100.
Under the Tory proposals it would be around £568.
At fifty employees the the dfference is more pronounced. A company of that size will pay almost £15,000 more under Labour and £7,000 under Tory proposals.
The really big changes come to those who employ hundreds of people and the very small number of companies who employ more than a 1,000.
At 1,000 staff the Labour rate rise means a hike in contributions of £292,800. Under the Tories the figures is £142,100.
I want to make two points from this.
First, the accusation that this is a tax on jobs is late to the party. NI was introduced in 1911. Making the tax on jobs claim is one that could have been made for a long time.
What we are really talking about is the increase. It doesn’t matter which argument you make a company will face higher contributions under a Labour or Conservative government. Labour will raise more than the Tories.
The Tories have tried to be clever. By raising the thresholds they have tried to take some people out of the NI net. You will have to earn £6,812 a year to make contributions. The median full time wage last year in the UK, according to the ONS, is £25,428.
This will make little difference to the vast majority of businesses employing full-time workers.
The conclusions are these. The language of a tax on jobs is a pretty odd one. Both parties back a tax on jobs and both are proposing to increase the tax. But by different degrees. One is bigger than the other. No one is claiming we should abolish employers’ NI contribution.That’s what employers should be thinking about. That’s what their sums will be based upon.
One other point (Chris Giles in the Financial Times does this better than I can), the argument over the money saved, or not, on National Insurance, involves a total cost of £6bn.
That’s pretty small beer compared to the overall deficit of £167bn. Unless there are significant other savings, at the time, that £6bn will make little difference – the problem will remain.
Does National Insurance therefore deserve all the passion and attention that’s been injected into it, in the way that it has? I’m not so sure.
Lastly, Nick Clegg emerged as the winner from last night’s TV debate. But then, from my recollection, he remained at some distance from the NI argument. The man has a nose for tactics, it seems to me.