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The History Of National Insurance

And some thoughts on its future ...

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Posted by Roger Eddowes on 10/05/2021 @ 8:00AM

We all pay National Insurance, but did you know it's been around for 110 years now? However, people are wondering if it has strayed from its original purpose and asking if it should be abolished ...

National Insurance and Income Tax all end up in the same pot, so why not just merge them?

National Insurance and Income Tax all end up in the same pot, so why not just merge them?

 


It was originally an insurance scheme where employers could buy stamps to act as proof an individual was entitled to benefits if their employment ever ended. At the time, employment benefit was administered by the Government of the day, however, health and pensions were provided by friendly societies and trades unions.

"National Insurance was originally introduced in 1911!"

It was expanded in 1942 when the allied forces turned the direction of the Second World War. William Boveridge proposed an expansion of National Insurance (NI) in a report called Social Insurance and Allied Services where he proposed that all benefits mentioned above be provided by the Government.

This would give citizens of the United Kingdom protection against the 'five major ills' of disease, want, ignorance, squalor and idleness. These new ideas were gradually introduced between 1944 and 1948 when Clement Atlee's Labour Government created the Welfare State as we recognise it today.

Of course, over time, demand for NI-funded services outstripped contributions, so in 1975, income-related contributions were introduced, creating the National Insurance Contributions (NIC) system we have today.

However, many people, including myself, are asking if National Insurance is still fit for purpose and wondering if it should be abolished completely. There are four possible options available to the Government:

  • Merge National Insurance and Income Tax

  • Overhaul and improve the existing system

  • Send NI back to its roots as a social safety net

  • Leave it as is

All these options have been discussed in workshops, and when it comes to the accountancy community, it has generally been agreed that it should probably be overhauled ... possibly even quite radically.

I said in my pre-budget blog post that I felt Chancellor Rishi Sunak should merge NI and Income Tax into one. I stand by that as both National Insurance Contributions and Income Tax end up in the same pot, so why not merge them?

Of course, merging would mean that Income Tax would have to be increased considerably and no Government is going to want the general public to perceive that ministers are putting up their tax contributions, even if NI disappears at the same time!

So, it's a complex situation whereby the newly combined NI and Income Tax would require a new name, but the Government will need to take a good long look at recent political history to ensure we get a council tax people will accept and not a poll tax that causes riots.

Still, it's certainly worth thinking about.

Until next time ...

ROGER EDDOWES
Business Godparent

 
 



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About Roger Eddowes ...

 

Roger trained at Edward Thomas Peirson & Sons in Market Harborough before working at Hartwell & Co, followed by Chancery, as a partner. He started Essendon Accounts and Tax with Helen Beaumont in 2014 as a general practitioner with a hands-on approach.

Roger loves getting his hands dirty, working with emerging, small-to-medium and family businesses to ensure they receive the best possible accountancy advice. Roger utilises an extensive network of business contacts to leverage the best guidance and practical solutions.