1The contributory principle
4.The social contract between individuals and the state is central to the UK’s welfare model. The welfare system was conceived as a system of social insurance. William Beveridge’s plan was that individuals contributed to funding the welfare system via National Insurance contributions (NICs), and in return could expect to receive support up to subsistence levels when they were either unable to work or retired. In Beveridge’s vision, these contributory benefits would largely replace means-tested benefits. Beveridge’s model was never fully realised. Current benefits (including pensions) were, and remain, funded by current NICs rather than by a fully-funded insurance scheme. A widespread reliance on means-tested benefits to raise incomes to subsistence levels remains. Nonetheless, the principle of contribution remains a cornerstone of the welfare system.
5.Public support for welfare spending has been in long-term decline, though benefits for some groups (for example, pensioners) remain markedly more popular than others (for example, the unemployed).2 This may reflect wider public perceptions of the importance of contribution and the social contract. Perceptions of an imbalance between contribution and reward may weaken support for the welfare system overall.
Balancing contribution and entitlement
6.Historically, self-employed people received much less support from the welfare system than employees. This applied particularly to the state pension. With the introduction of the New State Pension in 2016, however, the greatest inequality in entitlement between the self-employed and employees was removed. The IFS explained:3
Previously, the self-employed accrued rights to the basic state pension, but not to the earnings-related top-up (state second pension) [ … ] The new single-tier pension being rolled out from April 2016 will instead apply equally to the self-employed and all employees; but while formerly contracted-out employees must now pay the full rate of NICs in return for this entitlement, the self-employed are seeing their entitlement increase with no such increase in their NICs rate.
7.The self-employed now have equal access to almost all of the support available through the welfare state—including parts outside the remit of the Department for Work and Pensions (DWP/the Department) such as the NHS. Matthew Taylor, leader of the Government’s independent review on Modern Employment Practices, told us:
Entitlements for self-employed people have grown [and] now self-employed people get I think over 99% of public spending entitlements [ … ] and most welfare entitlements as well.4
HM Revenue and Customs (HMRC) estimates that the effective NICs annual subsidy to the self-employed relative to the employed exceeds the value of their reduced benefit entitlement by £5.1 billion.5
8.Some small differences remain: self-employed people cannot claim the contributory components of Jobseeker’s Allowance (JSA) or Employment and Support Allowance (ESA). Nor can they claim parental benefits, though the Government has stated that it is seeking to address this, “the principal outstanding difference in benefit entitlement between employed and self-employed” as part of a wider exercise to reconsider other areas of difference in treatment.6
9.The Government announced in its March 2017 Budget that it intended to increase the rate of Class 4 NICs, which are paid by the self-employed, from 9% of profits to 11%.7 This would bring those contributions in line with those made by employed people, better reflecting near-equal access to services funded by National Insurance.8 The Chancellor subsequently announced a reversal of this plan but stated:9
It remains our judgement that the current differences in benefit entitlement no longer justify the scale of difference in the level of NICs paid in respect of employees and the self-employed.
10.Our welfare system, and public support for it, is founded on the contributory principle. The introduction of the New State Pension means the last major difference between the entitlements of employees and self-employed has been removed. It is now difficult objectively to justify the differing rates of contribution. Fairness must be the future direction of travel and, political constraints aside, the equalisation of NICs rates was right. The incoming government should set out a roadmap for equalising the National Insurance contributions made by employees and the self-employed.
2 P. Taylor-Gooby and E. Taylor, Welfare and benefits, British Social Attitudes 32, 2015
3 S. Adam, H. Miller and T. Pope, IFS Green Budget 2017: Tax, legal form and the gig economy, February 2017, p.228
5 HMRC, Principal tax reliefs, January 2017
6 Letter to the Chair of the Treasury Committee, March 2017
7 In 2017–18 they are paid at 9% on profits between £8,164 and £45,000 and 2% on profits over £45,000.
29 April 2017