Rishi Sunak would be foolish to use national insurance alone to pay for social care

Whatever happens, writes John Rentoul, the tax system is likely to become even more complicated

Rishi Sunak, left, and Boris Johnson, looking for the answer (AFP/Getty)

Boris Johnson and Rishi Sunak are close to agreeing to raise national insurance contributions to pay for social care, according to credible reports from the heart of government.

This has provoked a storm of protest from anyone who knows anything about tax policy. Torsten Bell, of the Resolution Foundation, said the government is right to say that social care needs more money and that this means higher taxes, but he also said that “raising national insurance is a terrible way to go about this – it asks younger and lower-paid workers to contribute more than older and wealthier people, compared to a fairer rise in income tax”.

Those are the reasons I would be surprised if the chancellor’s plan, when it sees the light of day, takes this precise form. Pensioners are exempt from national insurance contributions, which are also not levied on employees’ earnings above a certain level or on interest and dividend income. What is more, the Conservative manifesto said: “We promise not to raise the rates of income tax, national insurance or VAT.”

My assumption, therefore, is that what Sunak proposes is like national insurance, but it would be a new tax that would fall on pensioners and employees alike. What is interesting about the leaks of the Treasury’s plan is that sources talk about the decision of the Labour government to raise national insurance contributions to pay for higher NHS spending in 2002. It was a decision about which Tony Blair, Gordon Brown and their advisers were nervous, and yet it was one of the few modern examples of a tax rise that was popular.

It is no wonder that Johnson and Sunak are tempted by this example. Politically, it worked because the ground was prepared. Public opinion strongly supported higher NHS spending, and a rise in “national insurance”, with its implication that people get out if they pay in, was more acceptable than a rise in income tax. But it does not mean that Sunak has to copy the New Labour tax rise in every respect.

While people are more willing to support something called national insurance, it would quickly become a problem if MPs realised that the burden fell disproportionately on the young and the lower-paid – precisely those groups who have suffered most in the pandemic.

That is why it is interesting that The Sun described the national insurance rise as a “health tax”, and Jeremy Hunt, the former health secretary, called it a “health and social care levy”. What that suggests is that Johnson and Sunak will sell their plan as a new tax. It will obviously not be called a tax – remember how the poll tax was officially called the community charge. They might say that it will be “like” national insurance, but they will call it something with the word “health” in it (and probably the phrase “social care” as well), but it won’t be a tax: it will be a “levy”, a “premium” or a “contribution”.

What would make most sense, however, would be for it to be administered as a supplement to income tax, because then more of the burden would fall on those on higher earnings – above the national insurance contribution limit – and it would be paid by rich pensioners and would fall on interest and dividend income. The advantage of national insurance contributions, however, is that they are paid by employers as well as by employees.

Whatever happens, the tax system is likely to become even more complicated than it already is. All chancellors want to simplify the tax system, which in theory ought to make it more efficient. In practice, however, political necessity drives them towards complication and euphemism. By the time this tax rise sees the light of day, therefore, expect it to consist of a third tax formed out of a hybrid of income tax and national insurance and called something like the “health and social care premium”.

But if it raises the money to deliver some fairness to the social care system, those complications will be worth it.