Would abolishing National Insurance solve the IR35 problem?

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To the surprise of many, Jeremy Hunt used his Spring Budget to hint that it was the Conservative’s plan to eventually abolish National Insurance (NI) altogether. Three months on, it features as one of the just seven pledges on the Conservative Party website.

But is this long-term ambition realistic? And if so, would it remove the need for IR35?

We’ve heard this all before, no?

You’re not mistaken if, like us, you feel a sense of déjà vu. Both George Osborne and Phillip Hammond have also shared this long-term ambition whilst in office; the former even commissioning a consultation back in 2011 on the merging of Income Tax and NI.

Similarly, for years, politicians have liked to infer that all NI contributions go into one national pot that is then used to cover state benefits such as pensions. This went even further in 2021, when the government declared that the increase to NI would be used to fund health and social care.

In reality, the tax raised from NI just feeds into our public coffers like income tax.

So, what is stopping us from merging the two?

Historically, there has been a link between NI contributions and benefit entitlements which has thwarted many of the plans to align the two regimes. However, this link has been eroded, especially with the scrapping of Class 2 NI from April of this year.

Employee NI is also a tricky one to replace in terms of revenue. This is the deduction that appears on most payslips and would likely have to be replaced with a hike in income tax in order to plug the hole in Treasury finances.

This would most probably benefit employees at the expense of those that get their income from alternative means, such as those that pay themselves dividends or landlords, who would pay more as a result.

But for many, an increase in income tax would be a welcome compromise should the abolishment of NI also remove the need for IR35.

Removing the need for IR35 altogether

This would require Employer’s NI to be scrapped along with employee NI. Something that may prove too controversial or radical in reality.

Employer’s NI is the cost (usually) born by the employer. I use the term usually because some contractors have reported that since the reforms to IR35, they themselves are covering these Employer’s NI deductions when operating through an umbrella company.

This deduction is always used by government to justify the very purpose of the IR35 rules as it is the most obvious outlier in terms of tax paid by employees and the self-employed.

The below graph from 2022 illustrates this exact point often made by government officials and think tanks on the tax difference between employees and the self-employed. You can see that if you removed Employer’s NI, theoretically there would be little difference in the tax received by HMRC when it comes to employees and the self-employed, thereby (potentially) removing the need for IR35 altogether.

A graph of a tax penalty

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Source: The Institute for Fiscal Studies

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Meet the author

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Joshua Toovey

Senior Research and Policy Officer