The Labour government is facing renewed pressure from an influential ally to tackle the cost of living crisis by overhauling the National Insurance system. Andy Burnham, the Member of Parliament for Makerfield, has been urged to extend National Insurance contributions to income from property and savings, a move that could raise billions for the Treasury.
Compass-Backed Report Calls for Reform
A new report titled Better!, backed by Neal Lawson's Compass think tank, has called on Burnham to implement significant changes to the way earnings are taxed. Lawson, a key ally of the Prime Minister, argues that the current system creates unfair disparities in how different types of income are treated.
The report states: "Apply National Insurance to investment and partnerships income. Our outdated National Insurance system creates stark differences in how earnings are taxed according to their source." It highlights that while National Insurance is paid on income from work, it is not applied to investment income such as rent from property or interest on savings.
Unfair Tax Burden on Renters
The report points out a glaring inequity: "This means that landlords without a mortgage, earning huge sums of money during a housing crisis, are paying a lower tax rate than their renters whose only income is from their job." This disparity is particularly acute given the ongoing housing crisis, where rental costs have soared, putting immense pressure on tenants.
Furthermore, the report criticises the lack of an equivalent to Employer National Insurance Contributions on partnership profits. It notes that nearly half of all partnership income is received by the highest-earning 0.1 per cent of earners, often in legal and financial services. "Partners in firms are taxed at a different rate to regular employees - sometimes resulting in junior staff in partner firms paying higher tax rates than senior, better paid partners in the firm," the report adds.
Proposed Changes and Revenue Impact
The think tank proposes expanding the National Insurance Contributions (NICs) tax base to include income from investments and partnerships. This would remove economic distortions, ensure that income from wealth is taxed at the same rate as earnings from work, and ultimately be better for economic growth.
According to the report, these measures could raise approximately £6.1 billion a year - £4.2 billion from investment income and £1.9 billion from partnership income. This significant revenue could be used to fund public services or provide relief to struggling households.
Political Context and Reactions
The call comes as the Labour government seeks to address the cost of living crisis, which has seen inflation and energy bills rise sharply. Andy Burnham, who also serves as the Mayor of Greater Manchester, has been a vocal advocate for progressive taxation and social justice. However, any expansion of National Insurance could be politically sensitive, as it may be seen as a tax on savings and property, which could affect middle-class voters.
The report's findings have sparked debate among economists and policymakers. Proponents argue that taxing wealth income more fairly is a crucial step towards reducing inequality and funding public services. Critics, however, warn that such a move could discourage saving and investment, potentially harming economic growth.
Next Steps
While the report is not official government policy, it adds to growing pressure on the Labour leadership to consider more radical tax reforms. The government has not yet responded to the proposals, but insiders suggest that the issue may be discussed in upcoming budget deliberations.
For now, the spotlight remains on Andy Burnham and his response to these recommendations. As the cost of living crisis continues to affect millions of Britons, the debate over how to fairly tax income from work versus wealth is likely to intensify.
