UK-India trade deal: Britain's most misunderstood tax deserves the axe

By Matthew Brooker

For the second time in little more than six months, Britain's Labour government finds itself mired in a controversy over national insurance contributions. The latest row may be contrived, but it illustrates the murkiness and confusion surrounding a tax that tens of millions of people pay — but almost no one understands.

As part of the free-trade deal concluded with India last week, the government agreed to exempt employees on temporary assignment in the UK from this payroll tax. That spurred accusations from opposition politicians that Labour was selling out British workers by making it cheaper for Indian companies to send in staff from headquarters rather than hire locally. It’s a charge that doesn’t stand up to scrutiny.

National insurance is a massive revenue generator for the UK government, raising £179 billion ($236 billion) in the financial year ended in April last year, according to official data. Only income tax takes in more. Most wage earners pay 8 per cent while employers are subject to a 15 per cent rate — increased, controversially, from 13.8 per cent by Chancellor of the Exchequer Rachel Reeves in her October budget. (Rising employment costs have been blamed for a weakening labor market, with British businesses cutting jobs for a third straight month in April as the national insurance change took effect.)

In theory, national insurance contributions fund Britain’s social security benefits — principally the state pension. Eligibility depends on payment history: You need 35 qualifying years to receive the full entitlement (currently £230.25 per week, equivalent to about $304), and 10 years to get anything at all. This creates an obvious issue of fairness for employees posted temporarily by overseas companies. They may be forced to pay into systems in two countries simultaneously — and, in the UK, for benefits that they will never receive.

The same can apply to British workers sent abroad by their employers; hence, there’s a mutual interest in coming to reciprocal agreements. Such so-called double contribution conventions are common: Britain already has them with dozens of nations including Japan, Canada and Chile, as well as the European Union.

So far, so normal. What complicates the picture is that the UK’s national insurance contributions aren’t strictly “hypothecated” — meaning the money isn’t ringfenced for a specific purpose. This contrasts with the models of some other countries, including the US, where mandatory payroll contributions are placed into segregated funds and managed separately from the government’s general budget.

If national insurance adds to the general pool of government revenue, then it can be viewed as simply income tax by another name (as many researchers have argued). Indeed, when Reeves raised the employers’ rate and adjusted thresholds in October, she justified the measure by saying it was necessary to repair the public finances rather than by tying it to specific benefits. In this event, it might be argued that exemptions amount to a tax break that gives foreign companies and workers an unfair advantage.

That still looks like a stretch. The National Health Service takes a chunk of national insurance receipts — 25 per cent, or £41.8 billion, in the 2022-23 financial year. The rest goes to the government-run National Insurance Fund, which is used only to cover benefits tied to contributions (rather than universally available benefits) such as employment support allowance and statutory maternity pay. State pension payments took up 95 per cent of the £129 billion transferred to the fund in 2022-23.

Will Indian companies that second employees to the UK be free-riding on the cost of providing the NHS, a universal system where eligibility is governed by residency rather than contributions? Not really. Most of the health system’s budget — £182 billion in 2022-23 — comes from other sources such as income tax, for which they are still liable. What’s more, Indian employees arriving on visas will still have to pay an NHS surcharge, which currently stands at £1,035 per year for most applicants.

Granted, the double contribution convention does appear to favor India. The arrangement will lead to “significant financial gains” for Indian service providers and benefit a “large number of Indians working in the UK,” India’s Ministry of Commerce & Industry said in a release. The UK government gave this aspect of the trade deal much less prominence, saying that the change opens up a mere 1,800 extra visas and the length of exemptions will be capped at three years. There’s no smoking gun here. We should expect each side to trumpet its wins (whisky and cars, in the UK’s case) and gloss over concessions; the value of a trade agreement has to be considered in the round.

The lesson of this storm in a muddy teacup is that overly complex and opaque taxes offer an opportunity for mischief — whether by populist politicians looking to play on anti-immigration sentiment or governments keen to obscure the promise-stretching nature of their revenue-raising stratagems. Research groups have spent decades arguing that national insurance should be abolished, merged with income tax or otherwise reformed to create a simpler, fairer and more efficient system. Their case has never looked stronger.