George Osborne’s announcement that he will “stop Labour’s tax on working people” is broadly speaking a welcome one. He is referring, of course, to the government’s plans to put an extra 1% on employees’ national insurance contributions (with the basic rate rising to 12% and the higher rate to 2%) and employers national insurance contributions (which will rise to 13.8%). These tax rises are due to come into force in April 2011.
However, it is worth noting that Osborne’s plan does not involve any change to those rates, which will still rise under a Conservative government. What he actually said he would do is:
“We will take his [Gordon Brown’s] national insurance tax plans and we will raise the primary threshold for employees by £24 a week and the upper earnings limit by £29 a week. We will raise the secondary threshold at which employers start paying national insurance by £21 a week.”
By way of explanation, the primary threshold is the point at which you start paying employee national insurance contributions, the upper earnings limit is the point at which you start paying the higher rate. The government has already said it will raise the primary threshold to the level of the income tax personal allowance plus £570, and the Conservatives proposals are in addition to that. The government currently has no plans to raise the secondary threshold or the upper earnings limit.
Essentially then, Osborne has proposed to make the national insurance system more progressive – lower contributions from those with low income are compensated by higher contributions from those with larger ones.
Therefore the following statements can be made about George Osborne’s national insurance plans compared with those of the government:
- Anyone earning between £7,100 and £45,400 will be better off with the Tories than with Labour. For others, it won’t make a difference which party is in charge.
- Employers will pay less in employers’ national insurance contributions per employee under the Tories than they would under Labour.
However, one can also make the following statements about George Osborne’s national insurance plans compared with the existing system:
- If you earn more than £38,350, you will pay more national insurance than you do at the moment.
- If you earn less than £38,350, you will pay less national insurance than you do at the moment.
- If you earn more than £23,325, your employer will be paying more employers’ national insurance than they are now.
- If you earn less than £23,325, your employer will be paying less employers’ national insurance than they are now.
Overall then, this conclusion can be made: the Conservative plans are definitely better than the Labour ones, but are a mixed blessing compared with the status quo.