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01 Nov 2016 - National Insurance - Tax or Social Welfare? presented by Peter Allen
05 Aug 2016 - City Walk

National Insurance - Tax or Social Welfare? presented by Peter Allen



National Insurance-Tax or Social Welfare? was the theme of our meeting on 25 October, presented by Peter Allen, one of our regulars who is Research Manager, Tax Policy and Insight at the iCAEW.

Peter’s talk covered nearly 200 years from the early 19th century to the present day. The seeds of the idea of a national health and social welfare system were sown by the perceived harshness of the centralised workhouse system with its “demonization” of poverty.  The early Friendly Societies enabled modest contributions to provide substantial funds against sickness, unemployment and death,  and by the end of the 19th century the burden of the Poor Law on local taxation prompted some to see the German state health, unemployment and accident insurance system as the way forward. Early pioneers in the UK were Samuel and Henrietta Barnett who established the Toynbee Hall Settlement in east London, where William Beveridge and Clement Atlee were among the first volunteers.

The “Liberal Landslide” of 1906 accelerated the process and by 1914 the first old age pensions,  unemployment insurance and sickness benefits were on the statute book. Lloyd George, as Chancellor from 1908, was the main driver, supported by Winston Churchill at the Board of Trade.  The first pensions, non-contributory,  were paid from 1 January 1909 at age 70, at five shillings a week, to those with incomes up to £31.50 a year; though you had to be a British subject, resident in the UK for the last 20 years and not in prison during the last ten years, to qualify and even then, the final decision on entitlement was in the hands of local committees. By 1913, “outdoor” relief under the old Poor Law had reduced by over 90%.

In 1912 unemployment insurance had arrived, mainly for manual workers; contributions of 2s 1 1/4d a week, matched by employers and with the Government adding another third, provided seven shillings of benefit for up to 15 weeks. Health insurance, using panels of doctors, paid a maximum of £160 a year; for this the employee paid 4d a week, the employer 3d and the state 2d. But by the middle of the inter-war period the economic blizzard had overwhelmed the system and it limped into World War II relying on ad hoc doles and handouts.  The Beveridge Report of 1942 identified “Five Giants”, Want, Disease, Ignorance, Squalor and Idleness, as targets for the National Insurance Fund formed in 1948 alongside the Health Service. By 1961 NICs had become earnings-related and by 1985 the ceiling on employers’ contributions had been removed.

Today, State Pensions absorb almost 75% of the NI Fund,  with some 19% going into the NHS.  Class 1 and 1A contributions from employers and employees fund some 96% of the fund. Most businesses would certainly answer Peter’s initial question by calling NIC s a tax by another name, but his talk was a masterly tour of how we got where we are.