CIOT comments on Health and Social Care Levy announcement

The tax changes announced by the government today will:

Increase the gap between the taxes the government get from someone being employed and someone being self-employed

  • Increase the gap between tax people pay on their employment income and tax they pay on income from renting out property
  • Increase the share of taxes that come from employment income overall, partly in order to help people retain and pass on their wealth
  • Potentially set a precedent for including people of pensionable age within the scope of National Insurance

John Cullinane, Director of Public Policy for the Chartered Institute of Taxation, explained:

“National insurance contributions (NICs) are a tax on income but they are not the same as income tax. This has implications for how different groups are affected by today’s announcement.

“For example, NICs affect employed people differently from self-employed people. At 9 per cent the main rate of NICs for self-employed people is 3 per cent lower than that for employed people. Today’s announcement, in effect adding 1.25 per cent to each figure, will not change that gap. But that 3 per cent differential is dwarfed by the 13.8 per cent cost of employers’ NICs, levied on wages paid to employees but not on payments made to independent contractors. This will rise to, in effect, 15.05 per cent, amounting to an increase in the total tax burden on employment of 2.5 per cent of income compared to just 1.25 per cent for self-employment.

“Avoidance of employer NICs is one of the main drivers of misclassification of individuals as self-employed rather than employed (i.e. false self-employment). Those affected risk missing out on employment rights such as national minimum wage, holiday pay and sick pay, as well as costing the government money in tax revenues not received. This increase in the rate of employer NICs is likely to exacerbate this problem.

“A major difference between NICs and income tax is that income tax is levied on all income, including employment, business, dividend and other investment, income, whereas NICs is only levied on the first two: employment and business income. By supplementing the National Insurance increase with a rise of the same size in tax on dividends the government have ensured that those who take their income in dividend form will contribute to the costs of the health and social care package they have announced, but those who make a living from letting out property, for example, will not be affected by the tax increases announced today.

“It is also worth noting that, looked at in the round, today’s announcement represents a significant increase in tax on employment and business, in order to, among other things, help more people keep their homes and other assets in old age and pass them on to their descendants when they die. That is, taxing working age people more to protect the property wealth of older people. That is of course a legitimate policy choice for an elected government to make, if it is intended.

“One of the most interesting aspects of today’s announcement is that the new levy (National Insurance in all but name) will apply to pensioners, albeit limited to their employment income. The Government will no doubt argue that this new levy is a special case but it is hard not to see this as setting a precedent making it easier to bring pensioner earnings within the full scope of National Insurance at some point in the future.

“Finally, we note that the new Health and Social Care Levy, by being established separately from National Insurance, and with slightly different rules, represents a further complication of the tax system. The initial year in which national insurance will be raised will enable HMRC to build the systems to collect the levy. It Is hard to avoid seeing this as a diversion of scarce IT and other resources at a time when HMRC’s services to taxpayers and their agents are under severe strain. Presumably the government preferred to pay this price for the appearance of creating a new tax rather than of increasing rates of an existing one.”