The impact of raising the NICS threshold

It is widely reported that Boris Johnson has indicated that a Conservative government would increase the National Insurance threshold.

In response to this, Xiaowei Xu, a Research Economist at IFS, said:

"The Prime Minister Boris Johnson has said that he will raise the threshold at which people pay National Insurance to £9,500 in the first Budget of a new Conservative government. Assuming this would take effect in 2020-21 and include employee and self-employed thresholds (but not the employer threshold), it would mean a NICs threshold that is £712 per year higher than is planned under current policy. This would cut NICs in 2020-21 by about £85 per year for all those with earnings above £9,500 per year. It would cost around £2 billion in 2020-21.

Mr Johnson has also said he will eventually raise the threshold to £12,500, but has not stated by when. The threshold rises automatically with inflation over time anyway, so without knowing the proposed timescale of the increase we do not know how big a policy this is.

Successive governments have fixated on income tax at the expense of NICs, for example by raising the income tax personal allowance while doing nothing to NICs thresholds. The attention to NICs is therefore both welcome and overdue. It is also the best targeted way of helping low earners if restricting oneself to the direct tax system.

That said, if the intention is to help the lowest-paid, raising the NICs threshold is an extremely blunt instrument. Less than 10% of the total gains from raising NICs thresholds accrue to the poorest fifth of working  households. The government could target low-earning families much more effectively by raising in-work benefits, which would deliver far higher benefits to the lowest-paid for a fraction of the cost".