Select Committee recommends equalising National Insurance contributions

08 May 2017

A report by the Work and Pensions Select Committee recommends balancing contribution and entitlement.

“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.”

Historically, self-employed people received much less support from the welfare system than employees. This applied particularly to the state pension, however with the introduction of the New State Pension in 2016, the greatest inequality in entitlement between the self-employed and employees was removed.

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 applies 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.

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) such as the NHS. Some small differences remain: self-employed people cannot claim the contributory components of Jobseeker’s Allowance or Employment and Support Allowance. 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.

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%. This would bring those contributions in line with those made by employed people, better reflecting near-equal access to services funded by National Insurance. The Chancellor subsequently announced a reversal of this plan but stated:

“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.”