What the National Insurance rise means for the tax burden
The government has recently announced plans to raise National Insurance by 2.5 percentage points for employees (split between employers and their staff) and 1.25 percentage points for the self-employed.
Following this, the press has reported that the move would take the tax burden to the highest level in quite some time.
We take a look at why.
What is the tax burden?
In this context, the tax burden refers to the value of all taxes raised by the government as a proportion of the national income, or the value of all the goods and services produced in the country.
The tax burden gives you a sense of the size of the state, relative to the economy as a whole, and the extent to which funding the state falls on taxpayers.
It’s worth noting that about 11% of the government’s spending is funded from non-tax income sources, so the value of taxes received and the level of public spending aren’t quite the same thing.
The Institute for Fiscal Studies (IFS) says: “Non-tax revenues include, among other things, income received by government from public corporations (for example, from local authority housing) and interest payments on government assets (such as student loans).”
Sometimes the tax burden is also used to refer to other concepts. For example, in recent years there’s been attention on what proportion of all income tax, described sometimes as the “tax burden”, is paid by the top 1% of earners.
Why the different estimates?
The IFS estimates that the increase to National Insurance would take the tax burden to 35% by 2023/24.
However the IFS isn’t the only organisation which estimates these things. The Financial Times claimed the tax burden would actually be at the highest level since 36.1% in 1950, not since 1969, because it estimated the new tax burden would be more like 35.5% rather than 35%.
Given that, after the March 2021 Budget which increased taxes, the OBR estimated the tax burden would reach 35% by 2025/26, it’s not unreasonable to assume the tax burden would rise higher still as a result of an increase in National Insurance.
Claims that the tax burden will be at the highest level “since the war” or “since 1948” seem harder to explain. The OBR estimates the tax burden was around 37% in 1948 and 1949. (We've contacted the Times to ask what itscalculation was based on and will update when we hear back. The Telegraph’s article goes on to show the projected tax burden of 35% is below the OBR’s figures for the late 1940s).
Finally, the IFS itself said the National Insurance proposals “will raise the tax burden in the UK to the highest-ever sustained level” - “sustained” being the key word, also used by the Daily Mail in its front page report, but not its headline.
The level seen in 1969/70 was not sustained. The other period when government revenue was higher than it is now relative to the economy (though we don’t know what proportion of this was from taxation specifically), was during the last years of the Second World War and directly afterwards. This was largely due to the unique circumstances of the wartime economy and was not sustained for long.
And prior to the Second World War - going all the way back to the 13th century - data collected by the Bank of England shows the value of taxes was much smaller relative to the size of the economy than it has been throughout the rest of the 20th and 21st centuries.