In his Pre-Budget Report yesterday, Alistair Darling announced that national insurance contributions for employees, employers, and the self-employed would rise by 0.5 percent from April 2011 onwards. That's on top of the 0.5 percent rise he had already announced, so the total increase will be 1 percent extra on all earnings over the Lower Earnings Limit (LEL), which is currently £4,940 but will rise to £5,044 for 2011/12.
National Insurance is not actually 'insurance', of course. Its proceeds are not hypothecated to fund benefits or pensions. It is just a tax levied on personal income to fund general government expenditure. So to all intents and purposes, this is an across-the-board, 1 percent rise in income tax. It would be far more honest for the government to bill it as such, and to merge income tax and national insurance into a single, unified structure. But then again, honesty isn't really the government's thing, is it?
Below, I've done a few tables showing how combined income tax and national insurance rates are going to change over the next few years, according to the government's plans. It's a real mess: we're going to go from having five tax bands in 2009/10, to nine in 2010/11, and ten in 2011/12. The progression of the rates is not consistent either – thanks to gimmicks like gradually withdrawing the personal allowance for people earning over £100,000, and having different thresholds for income tax and NI, they jump about all over the place, creating pointless confusion for no reason other than to conceal from people the amount of tax they are really paying.
I hope that the next government will undertake a programme of serious tax reform, aiming for clarity, simplicity, and lower, flatter rates all round. The ASI will be publishing a major new report on this subject in the run up to the general election, so they'll have no excuse for not knowing what to do.