Insurance

Regressive rise in National Insurance will hurt those who need it most

This spring could bring warmer weather but colder homes across our country as we all grapple with rising fuel costs. While we can’t reduce the demand for German apartments and Chinese factories that have driven prices up, we can think about where the rest of our salary goes to help people stay in control of their lives.

For the past two years, it has felt too much like a dream. Locked down with little chance of enjoying the company of friends and family, many of us were able to save, but others struggled. The work dried up and the bills arrived. Now those bills are rising, and not in isolation.

In April, another burden will hit working families – National Insurance increases. NI has always been misnamed. It’s not insurance, it’s another tax on income and employment. It is a way of extracting money from today’s taxpayers to meet today’s needs. There is no savings pot that can increase or decrease with investments.

This climb will be no different. This means cutting today’s wages to fund a social protection program that we plan to roll out at the end of next year. But this will not apply to everyone. Although the Institute for Fiscal Studies has said half of all those born in the prosperous 1980s will inherit more than £136,000, those born earlier and those in more difficult towns will inherit less. This is important, because this time NI is an insurance policy, but not the one we think.

In two months, the government will start collecting a 2.5% bonus on wages, which will protect inheritances over £86,000. Analysis by the Resolution Foundation think tank shows that a typical 25-year-old will today pay an extra £12,600 over their working life just for the employee share of the tax hike. It’s hard to say how much their boss will withhold to pay the employer half.

For many it will be insurance covering the risk of losing around £50,000, for others the same premium will cover sums many times that. But for many parts of our country, places where homes are worth less and inheritance values ​​are lower, that same premium insures far less.

It is true that many taxes provide for things that some of us will never use but from which we all benefit. The NHS protects our friends and families, and while we don’t need it personally yet, just by keeping our community healthy and strong, it protects us too.

This is different. While the pressure on households has rarely been higher and inflation eating away at savings, I can think of better priorities than ensuring that the wealthiest pass on their wealth.

Let’s be clear, it’s not just about a percent here or a pound there, it’s about the lives of our friends, our neighbors and ourselves. Poverty – even small strains on household finances – can strain relationships and test families. The real-world consequences are long-lasting and extremely damaging.

The government has already recognized this. Its own assessment says the policy is likely to have an “impact on family formation, stability or breakdown, as individuals, who are currently on the verge of financial management, will see their disposable income reduced”.

When this assessment was written, in December 2021, inflation was 5.4% and energy bills were being kept artificially low by the price cap. This week, the Bank of England raised rates again and predicted that inflation would hit 7.25%, while energy prices will soar.

That’s why I’m a fan of low tax rates. Not as an ideology but because it recognizes that personal and financial freedom are intrinsically linked. The job of politicians should not be to take control, but to give it back so people can decide for themselves. Economic freedom is fundamental to personal freedom and we should remove as little of either as possible to keep a community strong.

I did not vote for this tax hike because I did not see that it would help our whole community. I see the bills coming at a time that few people can afford. While some towns like Tonbridge could benefit, young people across the country, and especially in places like Tyneside and Glasgow, would be losers for years to come.

It’s not about competition between young and old or north and south, it’s about fair taxes to share the cost of our community life together.

Over the past five years, we have seen the price of division and the strength of cohesion. Society divided over a vote and rallied around a virus. As we look to the future, we need policies that promote opportunity and employment. It means freeing people to direct their efforts and assets where they think best.

We must remember that the state has a role – vaccines have proven it – but it is not the only solution. It might not even be the best.

Private contracts, signed in London cafes 300 years ago, changed the way we travel and trade. They proved that free trade is based on shared risk and managed it by calculating the insurance needed to cover the danger. In doing so, they created pools of capital that fueled an economic revolution.

So what about the inheritance insurance we are taxed for today? Well, for those who want it, there is a free market for ideas from think tanks and economists, and as we learned from Lloyd’s of London, some of them could change the world.


Tom Tugendhat is MP for Tonbridge and Malling and Chairman of the Foreign Affairs Committee