National Insurance -> Health and Social tax

The Post-War Welfare State (1948) unified sickness and pensions following the Beveridge Report (1942) “national compulsory insurance for all classes for all purposes from the cradle to the grave.” The principle you pay contributions to establish an entitlement to certain social security benefits later on, with the State Pension being the most significant of these.

Given the demographic pressures of an ageing population, rising welfare costs exacerbated by policies like the State Pension Triple Lock and the structural reliance on National Insurance contributions (NICs) a tax on earnings makes it fundamentally unfit and insufficient to fund rising costs driven by an ageing population who are primarily drawing on pension and investment income. What precise adjustments to the UK’s taxation system are necessary to ensure the sustainable funding of social security and an older populace going forward?

Solution

Faced with the challenges set out above, and taxes rises never being popular a key component to the future funding of NHS, Social Care, Pensions and Welfare must be secured by renaming National Insurance to the Health and Social Tax (HST). This policy moves the system to a progressive model to better fund public services and transparently communicates how these services are funded, while honouring the compulsory insurance principle laid out by the Beveridge Report and adapting it for the economic realities of the 21st century.

Implementation

The health and social tax (HST) would be revenue neutral as it covers the entire historic NICs burden and the funding gap created by reducing the Income Tax component. The marginal tax rate on earned income would not change and can be seen below:

- Current Basic Rate on Earnings: 20% Income Tax + 8% Employee NICs = 28%
- Proposed Basic Rate on Earnings: 18% Residual Income Tax + 10% Health & Social Tax = 28%

- Current Higher Rate On Earnings: 40% Income Tax + 2% Employee NICs = 42%
- Proposed Higher Rate on Earnings: 27% Income Tax + 15% Health & Social Tax = 42%
 
- Current Additional Rate on Earnings: 45% Income Tax + 2% Employee NICs = 47%
- Proposed Additional Rate on Earnings: 30% Income Tax + 17% Health & Social Tax = 47%

This model is revenue-neutral because the revenue lost from the reduction in Residual Income Tax is fully offset by applying the progressive HST rates to the newly taxed streams of pension and investment income.

Employer National Insurance Contribution would be rebranded to Employer Health and Social Tax (EHST) and kept at its existing rate of 15% (on earnings above the secondary threshold). This approach retains the essential ∼£110 billion revenue from employers, ensuring the employee contribution rates (10%, 15%, 17%) can focus on replacing the employee NICs and closing the overall social spending gap, rather than having to absorb the entire employer burden.

Impact

Removes a regressive tax

The Health & Social Tax itself is progressive:

  • Basic Rate: 10%
  • Higher Rate: 15%
  • Additional Rate: 17%

Broadens the base

The government makes up the funding shortfall by using the new tax to target income streams that currently escape NICs:

  • Pensioners: They would pay the 10% Health & Social Tax on their private/occupational pension income, where they currently pay 0% NICs.
  • Asset Income: Investment income (like dividends and rent) would be subject to the full progressive H&S Tax (up to 17%), which raises significantly more revenue than the current NICs exemption.

Broadening of the tax base generates the extra billions needed to fund the growing costs of the NHS and social care, making the combined system financially sustainable without an overall headline tax hike.

Politics

  • The reform corrects a core unfairness in the current system, converting the regressive National Insurance structure (where the rate falls for high earners) into a progressive Health & Social Tax where contribution rates rise with income.
  • Ring fencing funding is politically popular as it gives taxpayers a clear line of sight to where their money is going
  • The fundamental change is not the amount of tax paid by the average worker, but the expansion of the tax base to include pensioners and investment income, which is where the extra money needed for social spending comes from.

References

https://obr.uk/forecasts-in-depth/tax-by-tax-spend-by-spend/national-insurance-contributions-nics/ https://en.wikipedia.org/wiki/Beveridge_Report