Treasury Committee presses Chancellor on ambition to 'abolish national insurance’

The three hearings were:

• Session with Economists on 12 March
• Session with the OBR on 12 March
• Session with the Chancellor on 13 March

Below we have summarised some of the key tax-related points. We have grouped comments by topic, rather than reporting the sessions separately.

National Insurance

Harriett Baldwin (Con, and chair of the committee), challenged the Chancellor on whether some of his measures were influenced by “fiscal targets” rather than constituting a “strategic approach to fiscal decisions”. Jeremy Hunt, the Chancellor, disagreed that measures were “a bit higgledy-piggledy” and argued that, on the tax front, the government plan is “very clear”: “We want to bring down the tax on work and the unfairness of double taxation on work, because that brings more people into the labour market”.

Asked by Samantha Dixon (Lab) if wealthier households are the main beneficiaries of the Budget, the Chancellor replied he had chosen the national insurance (NI) cut because “it is the most beneficial for growth”. He claimed that the 4p cut in national insurance “fills about one in five vacancies across the economy” and “creates jobs for lots of people on low pay”.

Referencing the House of Commons library, Keir Mather (Lab), highlighted that merging NICs and income tax would require an 8% increase in the basic and higher rates of income tax. He asked the Chancellor to confirm that he “would not raise income tax in order to bring this policy to fruition”.  Hunt gave no specific commitment in his reply, saying only that the government would deliver the policy by “reducing national insurance”, adding that the objective is to “end the unfairness”.

Stephen Hammond (Con) enquired about the rising tax burden, asking about the factors contributing to this. Jeremy Hunt cited the pandemic, energy crisis and high inflation as factors and argued that since the autumn statement, the inflation forecasts have decreased. He added that due to the freezing of the thresholds someone with an average salary of £35,000 will pay just over £230 more next year than they would have if the government had uprated the thresholds with inflation. However the NI cuts would mean that they will pay £900 less.

In an earlier session, Dame Angela Eagle (Lab) asked the OBR about the impact of abolishing employee and self-employed NI on the likelihood of the government meeting their fiscal rules. The Chair of the OBR, Richard Hughes, stated that it depends on “their timeframe for doing it” and “what their plans are for the rest of the tax system”. He added that the government is currently raising around £50 billion annually in employee national insurance, and the overall tax take from NI is more than £100 billion. 

Mather queried if the OBR has a “headline view of whether a tax cut of that size would be inflationary”. Professor David Miles, a member of the OBR’s Budget Responsibility Committee, suggested that it would have the “same kind of dual impact” as the actual cut in NI announced: “it would give people more disposable income and they would spend some proportion of it, so everything else being equal that is somewhat inflationary.”

Siobhain McDonagh highlighted that more people would enter the higher rate of tax despite the NI cut, and see their taxes increase. Tom Josephs, another member of the OBR’s Budget Responsibility Committee, attributed this to the freeze in personal tax thresholds and high inflation, mentioning that “cuts in NICs at the macro level offset broadly about half of that impact”.

Eagle asked the economists about the impact of the plan to abolish employee and self-employed NI on pensioner taxation if it were funded through an increase in income tax. Paul Johnson, the Director of the Institute for Fiscal Studies (IFS), estimated the cost at £40bn for employees and £200bn if employer contributions were removed. He clarified that discussions refer to the employee contribution, as the employer contribution is three to four times larger and he did not think anyone was contemplating abolishing that.

Johnson suggested that a fairer scenario would be: “A world in which we are equalising the tax rate, apart from the employer bit, on earned income and other income… We would think it was a very strange world where we started off with the same rate of tax on all income and then suddenly started increasing it on earned income and decreasing it on other income”. While he recognised that would result in a redistribution from people over pension age to under, he considered it an appropriate approach.

The Chief Executive of the Resolution Foundation, Torsten Bell, observed that this would not be a perfect scenario “if you are a landlord or a pensioner” but nevertheless he thought it would be an improvement overall: “It would make a pretty significant difference to the quality of the tax system”. He stressed that the Budget “does not make much difference to pensioners because we are cutting a tax they do not pay”.

Eagle asked if “income tax should have to go up to pay” for NI abolition. Arun Advani, Associate Professor of Economics at the University of Warwick, replied  that it would be “an income tax cut of 2p for workers [but] an income tax increase of 6p on every pound if you are a pensioner or landlord”. He argued that this is just “a straightforward redistribution towards people who get their income from work, and away from people who get their income either from wealth or from pensions that would have been saved up from work”.

Asked about the claim that nearly 100,000 more employees would enter the economy as a consequence of cutting NI, Johnson said it was “plausible, but uncertain”, adding: “I would treat it with a considerable degree of uncertainty in terms of where we will actually end up.” He argued that, “if you are going to use the tax system”, reducing NI is not “a bad way of increasing labour supply”.

On pensioners, Hughes suggested that due to a triple-locked state pension, pensioners have had “full inflation protection on their state pension”. He emphasised the importance of not just looking at the specific measures announced in the Budget about taxation but taking into account “the relative protection that pensioners have had from the big rise in inflation via the triple lock”; as well as “what might be taken out of that in tax”.

On merging tax and NI on earned income, Thérèse Coffey (Con) sought the economists’ insights into this challenge. Advani said: “I guess the obvious answer is that it makes it very obvious how much tax we are charging people”. He suggested the move could lead to ‘sizeable’ increases in taxes for certain groups, such as pensioners and landlords. Torsten Bell also acknowledged the challenges and agreed that there would be some “hefty losers”.

Paul Johnson highlighted that this is the “first ever cut in national insurance” and said: “Don’t forget it was only two or three years ago that it was announced that national insurance would go up by a penny and a half or a penny and a quarter. This is part of the instability of tax policy that has been so damaging over such a long time”.

Non-doms

Dame Siobhain McDonagh (Lab) asked the Chancellor about his “180° U-turn” on non-doms policy. Hunt argued that the non-dom regime is “a very complex area of tax policy” which he did not wish to ‘rush’ into changing. He argued that the proposed changes will not damage the UK’s competitiveness, saying: “I do not think there is any justification for anyone paying a cheque and not paying the same tax as everyone else”.

On concerns regarding the unpredictability of revenue estimation for the reform when non-doms aren't specifically captured in HMRC data, Tom Josephs highlighted uncertainties about “the amount of overseas income and gains that those people have”. He also warned about the number of individuals who might “decide to leave the UK as a result of the higher tax burden that they face,” with an assumption of 10% to 20% departing. Josephs continued: “The final uncertainty is around the degree to which those people will undertake tax planning to essentially reduce their liabilities”.

Danny Kruger (Con) asked if the OBR has calculated the dynamic future effects of the non-dom policy. While suggesting that the proposed four-year regime is more ‘generous’ than the previous one, which might incentivise people to come to the UK to take advantage of it, Josephs said: “We did not make an adjustment for that due to evidence that suggests that tax is not a huge driver of location decisions”.

On the forecast of the number of non-doms leaving the UK due to the policy change, Arun Advani said: “You should certainly expect that there will be migration as a response to this”. He provided as an example that, following the 2017 reform, there was a 6% increase in individuals leaving the UK compared to expectations. While individuals residing in the UK for 15 years have a baseline 5-6% of probability of leaving, shorter-term residents have notably higher probabilities of leaving, around 20%, he added.

Advani also stressed that there is “a lot of uncertainty” around this issue, highlighting that “we currently choose not only not to tax these people, but not to collect data on what they even have”. He suggested considering “what information we want to have from people who are new arrivers” when designing a new system.

High-Income Child Benefit Charge (HICBC)

Danny Kruger welcomed the changes to the HICBC and asked if the Chancellor would “go further and scrap the charge altogether”. He also wondered if the commitment to have a household basis for HICBC assessment could be applied more generally in tax policy.

Jeremy Hunt warned that the government has “constrained resources” and acknowledged that the current system is not ‘satisfactory’. While some improvements have been proposed he said: “I want to see whether there is a much fairer system that can reflect household income in the way that the benefits system does”.

The Chancellor noted that there are objections to HMRC collecting data on a household level, so “I want to test parliamentary opinion on that and see if there is a way we can solve it for child benefit before we consider other steps”.

Asked about a claim that “there will be a 10,000 person, or full-time equivalent, addition to the labour force” as a result of the changes to HICBC, Tom Josephs of the OBR explained that “the taper range has risen and therefore the people who benefit from that will see a reduction in their marginal tax rate”. This would potentially increase the incentive to work for a set of people within that group.

Meanwhile, Kruger suggested that “[t]here might be an added incentive not to work”, arguing that “[t]he principle that now a single-earner family is not worse off being taxed at the £60,000 level than a two-earner family just below that level”. Josephs highlighted that the OBR has not looked at the potential effects of a calculation on a household basis.

Asked about his opinion on the changes to HICBC, Torsten Bell welcomed the threshold raise, however, argued that in the long run, “we should be looking to get rid of this charge”. Bell suggested this is not a good way to run a tax or a benefit system.

Kruger inquired if it would be possible just not to award child benefit to certain households. In other words: “Take it out of the tax system and just do not give rich people the benefit”. Bell argued the Chancellor’s current proposal is “quite complicated” and stated that generally “the system that has a means-tested level of child support within universal credit and then a universal system of child benefit outside that, I think, is not a bad system to have had, and so moving back to that at some point is the way we will remove a lot of the worst high marginal tax rates—but that costs money.”

Arun Advani agreed that moving towards a household system for the tax system adds complexity to it. He added that, if HMRC were to deliver the policy, “[o]ne obvious difficulty in the current way we administer it is that typically if you are only an employee, you do not have to file anything to HMRC. You only have to file if you are either above £100,000 or have income not from direct employment”. Harriett Baldwin intervened to note that the filing threshold is going up to £150,000. Advani reiterated that: “we do not particularly want them to file pieces of paper or online forms if they only have one source of income and it is employment income from one place”.

Kruger welcomed the household basis system and enquired whether there were potential difficulties “in terms of HMRC suddenly having to involve itself in prying into people’s relationships”.

While Bell preferred individual taxation, he said the “marginal incentives to work are also significantly effective for second earners if we move to a household-level system”. Additionally, he argued that a household basis system may reduce poverty “because you end up with lower taxation for some poorer households in that route”.

Advani also explained that, currently, HMRC does not try to link members of a couple. “Apart from the complexity of trying to design the system, there would also be a whole new administrative project in trying to link the couples”.

Property taxes and capital gains tax (CGT)

Anne Marie Morris (Con) expressed concerns about the impact of the Budget’s property tax announcements on the tourism industry and housing, particularly the removal of holiday letting relief.

The Chancellor acknowledged the importance of short-term lets in the tourism industry and said he was trying to address a ‘distortion’.  When asked why he did not consider the Office of Tax Simplification's (OTS) proposal, a bright-line test, for holiday letting relief, Hunt stated that the proposal seemed overly complicated.

On the OBR’s view that the “cut to the top rate of CGT would lead to a permanent increase in people selling properties”, Tom Josephs highlighted that, due to the reduced CGT rate, some owners who “may have been holding on to their property because of the tax cost of selling”, would be encouraged to sell those properties. While he acknowledged other factors such as changes in furnished holiday letting relief and multiple dwellings relief, he believed that they would have a ‘smaller’ impact on transactions compared to the CGT reduction.

David Miles further highlighted potential savings in CGT for long-time property owners, which could prompt some to act sooner.

Josephs told the committee that the OBR predicts that the measures would not “impact on property transactions to any material degree”. He continued that the removal of the furnished holiday let regime would change “the incentives around use of properties, rather than actually holding and owning a property”.

Morris asked Arun Advani for his view on the Chancellor’s claim that lowering the CGT rate would boost revenue and help first-time buyers. Advani replied that lower tax rates may encourage people to sell their houses quickly, adding: “when you look at the figures, what is driving the fact that there is increased revenue from this reform is that there will be more stamp duty being paid”.

Torsten Bell added that tax increases on second homes might shift the balance from investment to homeowner properties and potentially “could speed up” the transition towards more first-time buyer ownership. In the meantime,Top of Form Paul Johnson suggested, that could create more pressure on the rental market. He continued that, in terms of rental property, even following this cut it will remain “the most heavily taxed major asset that there is—it is still a really highly taxed asset to hold”.

Morris questioned whether abolishing furnished holiday let relief would have the impact the Chancellor predicts – “if you level the playing field, more people will go into long-term domestic rented”. Advani advised that tax adjustments may influence housing usage. For example, making furnished holiday lets more expensive may lead to alternative accommodations, possibly long-term lets.

Morris raised the OTS’s past concern about treating holiday lets as businesses or a “one-off property”, warning of potential disputes over different tax regimes. She asked whether the Chancellor should differentiate between them “rather than just making the two equal”.  While Johnson suggested the impact would be “quite small”, Bell argued Hunt is trying to classify these properties “more towards the second homes category” – which is “small fry” for the economy overall.

Yael Selfin, Chief Economist at KPMG, argued that “the main problem is things like stamp duty bringing in too much money and being politically difficult to change”, adding that the levy discourages people from moving to where they can be more productive.

Business taxes and VAT

There wasn’t much discussion of corporate taxes during the three sessions, However Thérèse Coffey (Con) did query the Chancellor's confidence in businesses embracing full expensing, considering the UK’s ‘services-intensive’ economy.

Responding, Jeremy Hunt acknowledged the UK's strong services sector but attributed productivity challenges in the UK to lower investment in machinery, IT and automation. He explained that the tax model change aimed to incentivise that investment in plant and machinery “which has historically been behind that in those other countries.”

Asked about the reason for raising the VAT threshold only by £5,000, the Chancellor responded: “That was the most that we could afford”. He expressed a desire to increase it further, and blamed a “tight settlement” for the chosen number.

On consideration of reinstating VAT-free shopping for foreign visitors, the Chancellor said: “If I could find a way to make that policy affordable, I would love to do it”.

Stephen Hammond (Con) enquired about the OBR's analysis of the financial impact of reinstating tax-free shopping, referencing to their 2020 assessment. Tom Josephs clarified that the OBR hadn't updated its analysis since it wasn't “confirmed government” policy, suggesting the original estimate suggested a £500 million annual revenue.

Hammond intervened and questioned the applicability of this data to future policy impacts, especially given market changes.

Josephs suggested that the OBR’s analysis shows around 30,000 non-EU individuals being ‘deterred’ from visiting the UK due to the policy change. He continued: “there is nothing in the data on the number of visitors since the policy [was introduced] that would lead us to think that it was wholly way off”. He elaborated that the OBR has adjusted for the impact on wider tourist spending resulting from these individuals not visiting, which wasn't considered in the original estimate. This adjustment indicates a “relatively small” loss of tax revenue but doesn't alter the overall yield that is generated from the measure.

Other issues – including simplification and overall tax levels

Stephen Hammond asked if the Chancellor thinks his Budget “has simplified the tax system or made it more complex”. The Chancellor responded: ‘simpler’, reiterating his ‘commitment’ to the committee ‘always’ to include “one tax simplification measure” (he may have meant to say ‘at least one’!). He said the biggest one in this Budget was probably the non-dom changes.

In addition, the Chancellor argued that he has “simplified taxes in every fiscal event that I have done”, suggesting that even if the OTS were “beavering away coming up with suggestions”, it requires a “political decision” from the Chancellor to implement them. He said he considered abolishing “the double tax on work” (ie scrapping employee and self-employed NI), which he described as ‘a long-term policy ambition’, would be “the biggest tax simplification in our lifetimes”.

Concerns were raised about households facing increased taxes despite the Budget's “tax-cutting” label. Tom Josephs argued that both fiscal events in November and March “had quite significant tax cuts”. He continued that the OBR estimates that “compared with pre-covid, the tax to GDP ratio will rise by about 4% of GDP by 2028-29”.

Asked whether the rise in the tax burden stemmed from economic changes or an “active choice of government”, Josephs reported that it has been the result of changes in the economy and suggested that higher income tax and NICs are major contributors. Josephs continued that higher tax-paying sectors doing “better and generating more profits”, and VAT has also been “quite strong”. He stated: “Part of the reason seems to be that there has been a fall in the tax gap, which is the difference between the theoretical amount of VAT out there and the amount that HMRC actually collects”. His colleague Richard Hughes added that the pandemic and the energy crisis have contributed to the higher tax burden.

In response to a query from Thérèse Coffey on tax avoidance, Josephs once again acknowledged HMRC's efforts in reducing the VAT tax gap, which he said had been helped by “the declining use of cash in the economy”.

Coffey then questioned why the OBR's economic model doesn't ‘agree’ with the Chancellor's emphasis on the link between lower taxes and increased growth. Hughes explained that the OBR's forecast includes the impact of frozen thresholds and increased fiscal drag on the labour supply, resulting in a “drag on hours worked and output” due to a rising tax burden from the rise in thresholds.

The OBR’s David Miles discussed the challenge of achieving “debt sustainability”, emphasising it requires tax increases and ‘tight spending’ plans.