How do we solve a problem like national insurance?

I once read some nutty explanation that ER NIC is there to stop the private sector monopolizing employees at the expense of the public sector and indeed that's the best explanation I've heard for it.

I thought one of the biggest arguments for a combined single rate is that this *would* then tax pensions and other passive incomes the same as earned incomes, albei if pensioners are such a protected species there is no reason why you couldn't have a different tax rate for pensions vs earned income. We already have different rates of tax for dividends for example.

Depends which way you are looking at it.

NI started off honourably enough and then fell into low company, politicians, treasury officials and the like. Politically, there is no will to get rid of it or change it much. Most MP's don't understand it and anyway, much better to have two things to play with than one.
The latest fudge, applying it to dividends, with all the nonsense spouted about personal service companies sharing the burden but nothing about those living off rents, or capital gains. So the usual load of ill thought nonsense we have come to expect.
Yes it needs to change but hell will freeze over first. Mores the pity.

any views on the upper threshold being removed to bring in greater value from the higher earners rather than just 1%?

Any change to abolish national insurance would highlight the true difference between an employee's take-home pay and the amount his employer is prepared to pay for that employee's services.

I agree that NI is odd and misunderstood. For example, so many people can't understand why they still have to pay it once they have a full state pension entitlement.

On the bright side, I'm the person in my office who understands it best, so I have my little niche as the "go to" person for NI queries! Just on that basis, I hope it survives unscathed for another 2-3 years until I hang up my Whillans Tax Tables!

The myth still persists that NI 'pays' for benefits and pensions, and the population are less resistant to increases in NI, plus chunks of it fall on employers. Therefore for political reasons, politicians will never agree to abolishing it. One way to sell imposing NI on pensions would be to devote some of the proceeds to the care system. Boris went part way towards this, but it got lost in the mess. Why is the broken care system never mentioned any more?

NI, like several other "specific" taxes, would benefit from being hypothecated.

Employers NIC should be based on the total wage bill, not the pay of individual employees. It is one of the reasons many large employers have loads of staff on 2 day weeks which, as well as reducing the Employers NIC payable compared to similar hours by full time staff, also often increases the benefits bill.

Why not have a real NI, ring fenced to pay for pension, NHS. So you want more to spend on NHS increase the NI. % paid by EE % paid by ER. The % is calculated each year based on expected or planned expenditure on pension and NHS.

(On an aside in NDL, ordinary tax is about 9% with their version of NI at 30%. So similar in total)

Ordinary tax goes to the rest not pension or NHS. Politicians can play with rates or different incomes.

But if you can make something difficult it will be the preferred option so hold no hope on it being sorted in my lifetime.

I've never believed that if the rate of UK tax, or NIC, is higher all the best brains will flee abroad.
Very few can make the same income or profits selling to people living in banana republics or they
do already. What tends to happen is profits & incomes made in the UK flee abroad, in other words, tax
evasion. There is though now a case for phasing out state pensions for younger workers
telling them they will be means tested fairly generously after a future date. It's ludicrous, to pay a temp as a Prime Minister £75,000 as a pension.

Interesting historical summary, but you've missed the strongest reason for keeping NI. It's not progressive. For many lowest paid workers EE NI is the only direct tax they pay. If it were merged into PAYE they would no longer have any stake in direct taxation. While this would make it easier to put up high-end income tax, it is fundamentally not healthy for any voters not to have any interest in the system. No representation without taxation, you might say.

My colleague and I had a meeting with John Whiting in 2010 recommending that NI be incorporated into income tax and his response was that the OTS had been to tasked to look at IR35 in the first instance. We suggested that this would solve the problem, but nothing came of it. As Nebs says, a simple percentage of payroll contribution (? separate payroll tax/employers' social security contribution?) could then be paid by the employer to cover the monthly cash flow gap to the Treasury.

Abolishing NI as a separate tax would reduce HMRC's staffing levels, salary and pension costs, estate costs, etc., so it would provide a further overall saving to HMG.

Different rates of tax for different income streams were always a nonsense, why continue this?

Forget complications like the hypothecation of taxes - that makes everything unnecessarily complicared again, and we will end up needing even more civil servants.

The real barriers to change are (1) the politicians do not want to be perceived to be increasing taxes, (2) professional bodies whose members make money out of tax work, (3) civil servants who continue their specialist employment, etc. Both (2) and (3) advise group (1) hence no progress.

"These two schemes were merged into one in 1948 to support the welfare state and the NHS."

That is incorrect. From 1948 to 2003 NI was purely a Social Security Tax. It was only when 1% (later 2%) was added to the deduction rates for Classes 1, 1A and 4 that the additional revenue from those increases was diverted to NHS funding. From 1948 to 2003 the NHS was entirely funded from general taxation and for the most part it still is.

Thank you to Jeremy Barker for the insight around the hypothecation of National Insurance. This means UK plc pays extra salaries, pensions, estates, software and other costs for some reason lost in the mists of time. The more recent 2003 amendment looks like a Labout job creation programme.

National Insurance is a tax. We should not hypothecate taxes as this is extra administration, and therfore extra cost. Certainly, we should analyse tax receipts, etc., through management accounting processes, but this does not mean that we need to tuck some money away in a separate account and report separately! It reminds me of the pre-war advice to householders to put cash by each week in separate pots (teapots, jam jars, or whatever) to pay larger bills when they became due.

When are we going to get into the 20th Century, yet alone the 21st?

I would like to see the definition of income/earnings for NI scrapped and for the Income Tax definitions to be used instead. That would improve simplicity while not affecting the operation of NI.

Scrapping or merging NI into Income Tax is just a step too far for the politicians, so we can forget about it.

'Why not merge NIC and income tax?
If a full merger of income tax and NIC was achieved, so that all income tax rates were increased by the NI payable on the same income, employees would see little difference in their take-home pay. '

It will not be done for political reasons the Conservatives are the party of low taxes, but historically High NI, you know NI the one that most people are blissfully ignorant about and politicians very rarely mention unlike I.T. and C.T., for the self employed it makes effective tax 29% (or closely) no party is going to mention 29%tax + in their manifesto).

'Clever' politicians will always try and dress up any methods to obtain more Government spending capability as fair on those paying. NI is a classic example of a tax that has evolved because of that. It is not ring fenced as was originally 'sold' to us. I'm sure there will be a lot of us that remember the wages deductions in the late 60's and early 70's. We had a GP (Graduated Pension) deduction. We were told that it would be our own pot for retirement. Little did we know then that this money was never ever 'put aside' as promised.
Smoke and mirror strategy all the way!

It's already been mentioned above by Richard Snape (18/11 16:39):

"Given that current pensions are paid for with current contributions. Younger workers might reasonably be unhappy at paying for the pensions of their seniors, having been told they wouldn't get a pension themselves."

This is exactly the reason why income tax and NI will NEVER be merged. There may be all sorts of good reasons why they should as mentioned above (although, frankly, I don't find any of them particularly compelling) and there may be all sorts of expedient reasons why politicians wouldn't want to as also mentioned above but FUNDAMENTALLY a merger is an impossible sell to Joe Public. And rightly so in my opinion because a merger will be seen as another brick in the wall towards abolition of the state pension.

"Yes, Mr Joe Public, I appreciate that you've been contributing to what you thought was your state pension pot for the last 20/30/40/whatever years and that you now see that heaving into sight on the horizon but actually, sorry and all that, you were wrong in your belief and that was all for nothing." That will go down like a lead balloon.

To my mind it doesn't matter how you slice and dice tax. It is still too much with a bloated civil service.

This is the elephant in the room, not tinkering around with labels

The overall burden is too much. No doubt the regime should be simplified, but the biggest issue is public spending, efficiency and waste not rearranging the deckchairs on the titanic!