Labour is urged to reform National Insurance

THE ABOLITION of the upper- earnings limit on National Insurance contributions is highlighted in a policy paper by the independent Commission on Social Justice set up by John Smith, Labour's leader.

Scrapping the limit helped to destroy Labour's general election campaign, when it was targeted by the Tories with a 'tax bombshell' attack. It would mean those earning more than about pounds 21,900 would have to pay more tax through NICs.

Mr Smith, who proposed scrapping the upper-earnings limit as Labour's shadow Chancellor, may reject the findings. But the paper on social insurance by Fran Bennett, a former director of the Child Poverty Action Group, makes it clear that abolition should be on his agenda again, if Labour plans any radical reform of NICs.

'The upper-earnings limit creates an illogical dip in marginal tax rates; and its link to prices rather than earnings, together with the widening disparity in earnings levels themselves, means that an increasing proportion of higher earnings is escaping the National Insurance net, with the higher-paid therefore contributing less towards these benefits . . .' Ms Bennett said.

The paper looks at ways of reforming the system under which most working people between 16 and the state pensionable age are required to pay contributions into the National Insurance scheme. Abolishing the upper-earnings limit is proposed or implied in three out of the five options for reform which Ms Bennett raises for the commission to consider. It could be scrapped if the present contributory system was kept and strengthened, if it was changed to contingency- based earnings replacement benefits, and if it was diluted by merging NICs with income tax.

Other options are for limiting the scope of contributory benefits by focusing them on the poorest, as proposed by David Willetts, the Tory MP and former head of the Centre for Policy Studies; and supplementing contributory benefits with participation income.

Strengthening the contributory system would restore the earnings link to benefits, which was broken by the Tories soon after Margaret Thatcher came to office. If Labour adopted such a scheme, it would redistribute wealth from the high earners to the poor.

It could be paid for by an earmarked payment, kept separate from income tax. More people could be allowed to claim benefits, but those on lower incomes, working 8 or 12 hours a week, may be required to pay contributions.

Ms Bennett makes no recommendations but says there appears to have been a shift in opinion, in favour of keeping the contributory principle, possibly under influence from the European Community.

Social Insurance, reform or abolition? Fran Bennett; Institute for Public Policy Research, 30-342 Southampton Street, London WC2E 7RA; pounds 2.95.