UK urged to scrap National Insurance and roll levy into income tax by IEA

The UK government should scrap National Insurance Contributions (NICs) and roll the levy into income tax the Institute of Economic Affairs (IEA) told IBTimes UK on Thursday (16 March).

Julian Jessop, the chief economist for the free market think-tank, said that such a reform would simplify Britain's tax system.

"The idea that you have a hypothecated tax to pay for your old age pensions and so on has long gone by the board. It's not exactly the same as income tax because old people don't pay it once you're past a certain age, but it is effectively an income tax," he said.

Jessop also argued that the move would lower the overall tax burden for millions of workers across the UK. "Yes, the income tax you pay would go up in the sense that the tax called 'income tax' would go up," he explained.

"But my point is NICs are a form of income tax, it's just that they are called something different and collected in a slightly different way."

The bold proposal comes after Chancellor Philip Hammond embarrassingly U-turned on his Budget plan to axe class two NICs for the self-employed and hike class four NICs (the main rate) by 2%.

The senior Conservative claimed the reform addressed a "discrepancy" between NICs rates for employees and those in self-employment. But the Conservatives promised not to raise VAT, NICs or income tax in their 2015 general election manifesto.

Jessop admitted that there would have to be a "big public debate" before his plan to scrap NICs was politically palatable.

"Clearly the government is not ready to make this case [at the moment]," he said. "Public spending is continuing to rise, the tax burden is continuing to rise, so it's not yet focused on reducing the burden of tax and public spending the way that I think the economy would benefit from."

Alan Soady, head of media for the Federation of Small Businesses (FSB), welcomed Hammond's decision to climbdown from the NICs rise.

"We've been campaigning on this as you know, we certainly thought it was very much giving the wrong impression...it risked being a disincentive for people going and setting up on their own and branching out and becoming self-employed," he told IBTimes UK.

Soady added: "Even not related to NICs, things like getting a mortgage for example can be quite tricky [for the self-employed]. There's all these things going into the mix that's which is why in the past there's been always been this lower rate of NICs."

Hammond's future in Number 11 now looks uncertain after his credibility took a blow over the NICs U-turn.