Ten initiatives to help young people: 9. No National Insurance for under 25s on minimum wage


Government has committed itself to raising the income tax threshold to the level of the minimum wage and indexing it there so that it will automatically rise to match any increases in the minimum wage.  The Adam Smith Institute has urged this for many years, largely on the grounds that if people are on wages that are reckoned to be the minimum, the state should not be taking money from them in taxation. There is one further thing that the government could do in this respect, however.  People on minimum wage are still liable to pay National Insurance, which has a threshold lower than that for income tax.  Since young people feature prominently among those on minimum wages, this hits them hard, taking money from those already struggling to get by on minimum wage.

It would help those young people if it were government policy to make the two thresholds the same for the under 25s.  That is, the NI threshold for them would rise to the minimum wage level, so that when government achieves its aim to equate the tax threshold with the minimum wage, those under 25 on minimum wage will pay neither income tax or National Insurance.

In large measure the whole system of National Insurance is an anachronistic anomaly.  Although originally conceived as an actual social insurance, it has long since ceased to be so.  There is no fund, and it operates like income tax on a pay-as-you-go system, with today's payments being used to meet the needs of today's beneficiaries.  The case for integrating NI into income tax is strong, but before then there is as a stronger case for calculating liabilities on the same basis as for income tax, with the same thresholds and exemptions.  If government feared how people would react when they saw how much tax they were paying in reality, they could run it as an "employment tax" running alongside income tax.

As a first step in that preferred direction, they should now have the NI threshold equated with income tax for the under 25s.  The further alignment of the two can be done later in systematic stages.  But the help given to low-paid young people would be immediate and effective.