NICs currently penalise 3.4m of the lowest paid workers. This must change.

by Joe Anderson

The rise in zero-hour contracts since 2010 is well-documented. The ONS estimates that the percent of people in employment on zero hour contracts has increased from 0.57% in 2010 to 0.84% in 2012. Ed Miliband is therefore right to call for a ban on their exploitative use. What, however, has not been often discussed is how the National Insurance system inflicts extra hardship onto workers on zero-hour and many other flexible contracts.

Unlike income tax, class 1 National Insurance contributions (NICs) are calculated on a weekly—rather than annual—basis. Whilst this may seem like a subtle difference, it has profound effects for those whose earnings vary significantly on a week-by-week or month-by-month basis, such as those on zero-hour contracts.

The class 1 NIC primary threshold in 2013/14 is £149, meaning employees earning over £149 in a given week are liable to make NICs. Yet, a significant number of people earning less than £7,775 per year (the annualised equivalent of the weekly primary threshold) will still be compelled to pay NICs. The reason for this is because if they earn more than £149 in any week (or £646 in any month, if paid monthly), they will be required to pay NIC, regardless of their annual income.

To illustrate the perverse effects of this anomaly, consider our conjectural protagonists, Jack and Jill.

Jack and Jill are both shop assistants paid on a weekly basis at national minimum wage. Jack is employed on a fixed-hours contract for 20 hours a week, whilst Jill is employed on a zero-hour contract.  Jill finds herself with hugely varying hours, alternatively working 40 hour and 0 hour weeks. In the every other week that Jill gets hours, she receives gross pay of £252.40, putting her over the primary threshold. Jack instead consistently gets paid £126.20 every week, keeping him below the primary threshold. Both Jack and Jill work 1,040 hours per year, at the same employer, for the same wage, earning £6,562.40 each per year gross.  Jill, however, will find herself receiving £322 net less than Jack annually, as she will be liable to NICs due to her sporadic income, whilst Jack—with his regular, fixed pay packet—will pay none.

It is not just those on zero-hour contracts who are hit by this inequity. Seasonal workers and students are also penalised; if a student works full-time during their vacations, they will be liable to National Insurance, despite likely being very likely under the annualised equivalent of the primary threshold.

This is not a niche, hypothetical issue; in response to a Parliamentary question, the Treasury confirmed that 3.37 million people with an income of less than £7,225 (the annualised equivalent of the 2011/12 primary threshold) each paid an average of approximately £113 in NICs in 2011/12.

Whilst the obvious answer would appear to be the annual rather than weekly calculation of National Insurance contribution liabilities, this is not an easy fix. Removing the anomaly of weekly calculation would cost the Treasury around £400 million annually, as it currently receives this amount from workers who fall victim to this inequity. Whilst increasing the upper earnings limit could fund this, doing so would further disconnect NICs and income tax, and could lead to a massive jump in the effective marginal taxation rate faced by higher rate taxpayers that would likely be deemed unacceptable.

Perhaps the necessary solution is a radical rethink about National Insurance. National Insurance’s near-century of history leads to a labyrinthine system riddled with anomalies and inequities. There are tough questions Labour needs to address: should National Insurance—at least when examined in isolation—be allowed to continue as a regressive effective tax? Is there still sufficient merit in separating it from Income Tax, or, as Callum Anderson suggested, should the two be merged? Has the system sufficiently accounted for quite how many people have multiple jobs? A major review of National Insurance could allow us to further establish our economic credibility by increasing transparency in taxation, whilst also allowing us to design a fairer system.

There are no simple solutions. But all progressives need to be aware of how National Insurance is hitting workers who are already struggling to make ends meet, and all progressives need to think about how we can make National Insurance deliver for these people.

Joe Anderson is the secretary of the London School of Economics’ SU Labour and Co-operative Society

Tags: , , , ,

3 Responses to “NICs currently penalise 3.4m of the lowest paid workers. This must change.”

  1. Tafia says:

    National Insurance needs scrapping and incorporating into income tax. Not only would it be easier to administer, but it would be cheaper requiring just the one computer system, one set of offices and a lot less staff.

  2. David Walsh says:

    I also used to have a general view that we should have harmonized benefits and personal taxation (including NI) and therefore have both positive and negative taxation (money in and money out, so to speak) but then we had the train crash of Tax Credits, something that could be seen to have been a way station to that premise, so not so sure now. Thoughts from author and readers ?

  3. Mark Dunn says:

    This account misses an important issue that affects people on low incomes and flexible hours, such as zero hours contracts. I have a zero hour contract, doing home care work.

    I know that some weeks I will need to pay voluntary contributions, but how do I do this and how do I do this in a timely manner? I am lucky that I have some capital to help pay these voluntary contributions. I am investigating this at present. If I don’t pay these contributions, I will lose out on some important benefits (e.g. reduced pension). This is another major cost to me. From my preliminary examination of this issue, it seems quite hard to address and may well need to be done months or years later, or possibly I end up over-paying my NI contributions. So this is another set of problems for people on low income.

Leave a Reply