National insurance payment cut to mostly benefit middle and higher-earners, says IFS
Prime Minister Boris Johnson’s plans to raise the national insurance contribution (NIC) threshold would mostly benefit middle and higher-income households, the Institute for Fiscal Studies (IFS) has said.
The Conservatives intend to raise the point at which workers pay national insurance to £9,500 in 2020/21 from its currently-planned level of £8,788. The party also intends to eventually raise the threshold to £12,500.
Read more: Boris Johnson hints at plans to hike national insurance threshold
Johnson revealed a rough outline of the plans at an engineering plant in Teesside yesterday. “We are cutting tax for working people,” he said. The policy would make all those who pay NICs £85 better off next year, according to the IFS.
However, analysing the plans today, the IFS said that on average the poorest 10 per cent of working households would only gain around £40 a year. Meanwhile, the 30 per cent with the highest income would gain around £180 a year.
One reason for this is that many of the poorest households would be unaffected by the changes because they do not earn enough to pay national insurance. Another is that households with two people in work tend to be further up the income scale and would benefit twice over from the policy.
A third reason is that some benefits are assessed on the basis of after-tax incomes, so many low-income households would see some of the gains clawed back through reduced payouts.
IFS research economist Xiaowei Xu said the attention to NICs is “both welcome and overdue”. Yet she added: “If the intention is to help the lowest-paid, raising the NICs threshold is an extremely blunt instrument.”
“The government could target low-earning families much more effectively by raising in-work benefits, which would deliver far higher benefits to the lowest-paid for a fraction of the cost to government – but at the expense of expanding means-testing.”
If the threshold was raised to £12,500, most employees would benefit by around £445 a year, the IFS said. Yet it said the policy would be “a substantial and expensive giveaway” costing at least £8bn a year.
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Matthew Lesh, of the free-market Adam Smith Institute think tank, said: “Britain has an extremely progressive tax system, with the bottom half of earners paying less than one-tenth of all tax.”
He added: “Raising the threshold will help the worst off by increasing the well-deserved return from going to work.”