so that everyone paid the same. Thanks to Gordon Brown, you now also pay 2 % NICs on your earnings over the £43,000 threshold.
Employers' NICs are 13.8 % of our entire salary above £8,112 without any upper limit. That means employers' national insurance embodies the Golden Rules of tax: following the First Rule, it is kept separate from income tax, even though it is a tax on income. This disguises just how much we actually pay. It is also in accordance with the Second Golden Rule: no matter what name is on the bill, all tax is ultimately suffered by human beings. Because this element of national insurance is paid by our employers, we don't realise that we are suffering it. But, despite all the subterfuge, ordinary people still end up shelling out.
If you are in work, it's a good rule of thumb to treat NICs and income tax as the same thing, although there are, inevitably, various wrinkles and complications in the rules. For example, savers and pensioners pay income tax but not national insurance. When you factor in employers' NICs, this means there is twice as much tax on wages from work than on money you get from savings or your pension. This might make sense economically, since we do want to encourage saving. And maybe it is fair that pensioners, after being taxed all their lives, don't have to keep paying national insurance after they've retired. But that doesn't explain why wealthy pensioners are taxed a great deal less than low-paid workers.
In most respects, however, NICs and income tax are drawing ever closer together. For example, until 1991, there was no national insurance on many perks such as company cars. Even in the 1990s, it was still possible to exploit gaps between the rules on income tax and NICs. Some city firms were paying bonuses in gold or diamonds to avoid national insurance (which was payable on cash wages only).
More recently, both Labour and Conservative governments have been ironing out the smaller wrinkles to make national insurance and income tax as similar as possible. Nowadays, many benefits in kind, including company cars, are subject to both income tax and employers' national insurance. They go on a special form called a P11D and you pay tax on the monetary value of a benefit as if it were cash. As it happens, one of the most tax-efficient perks available today is not turning up to work. If you take extra holiday as a benefit (and many firms allow their employees a few extra days a year in exchange for sacrificing some of their salary), the cost to you is only the pay you would have received after tax.
Although income tax and NICs are now administratively almost identical, no politician is going to amalgamate them into a single transparent rate of tax. After all, under the First Golden Rule, there is no sense in emphasising how high the combined rates of tax that we pay really are. Tory MP Ben Gummer did suggest in 2014 that NICs should be renamed ‘earnings tax’. That would, at least, be a candid name.
Paying tax
Most people with jobs don't have to worry about paying their taxes as it is all done for them automatically. Payslips show the tax paid, but many of us never really look at any figure except the bottom line, which is our take-home pay. We pay most of our taxes through PAYE, which was invented at the end of the Second World War as a way to improve the efficiency of tax collection. From the point of view of the government, it has three major advantages. The first is the official one. The administration of the tax system for employees was handed to the people they work for. It was no longer necessary for individual workers to figure out how much tax to pay. Instead, our employers calculate the tax we owe and deduct it from our salary. We only ever receive our net wages. The tax component is paid straight over to HMRC. In effect, this privatised a large chunk of tax collection. The primary responsibility for gathering tax was transferred from the tax authority to employers. They bear the cost and suffer the penalty if things go wrong. It is much easier for HMRC to audit employers' tax collection systems than it is to check the tax returns of all the individual employees.
The second advantage of PAYE for the government is that it accelerates when the money arrives in the Treasury's coffers. With PAYE, the government gets paid monthly, just like we do. I receive my net salary and the Exchequer receives both the income tax and national insurance. Given that, between them, NICs and income tax collected through PAYE account for over half the government's total tax-take, the cash flow benefits of regular payment are extremely significant.
The third advantage of PAYE is the subtlest, but perhaps the most important: we never see the tax we are paying. Out of sight, it is kept out of mind. Employers' NICs are also concealed in plain sight. Most of us never think about them or realise that they are a tax on our salary just as much as income tax. Even though employees' national insurance and income tax are supposedly taxes that we pay ourselves, the system requires businesses to pay these taxes on our behalf using the same PAYE machinery with which they account for employers' national insurance. So we never possess our money before the government gets its paws on it.
Ensuring that we hardly ever have to pay any tax directly is a major pillar of the UK's revenue system. In fact, it is a principle that deserves to be enshrined in the Third Golden Rule of tax: taxes are kept as invisible as possible. The government wants to avoid people paying their taxes directly so they are less likely to notice them. I can explain why this is so important from personal experience.
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