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National insurance complicates quick-fire tax quiz

The scale of “financial ignorance” in Britain is shown in a credit card provider’s recent survey, according to The Times (£). Only one in three people know the standard rate of VAT, and the average score in a multiple-choice test on personal finance was 2.6 out of ten, it reported. Question 4 was:

“How much money do you have to earn now before you have to pay taxes in the UK?”

The answer provided in the article was £12,500, which is the income tax personal allowance for the current tax year 2019/20. But what about national insurance contributions?

How useful is online guidance here? I wondered what I’d find via a Google search for “personal allowance”:

  • The top search result was FreeAgent’s “featured snippet” (a Google presentation box thing) telling me that the basic personal allowance, described as the “amount of income each individual is entitled to receive free of tax each year”, is £12,500.
  • The second search result took me to HM Revenue & Customs: “The standard personal allowance is £12,500, which is the amount of income you do not have to pay tax on.” HMRC also links to guidance on the marriage allowance and the blind person’s allowance, and points out that the personal allowance is reduced where income exceeds £100,000.
  • The fourth result linked to the Low Incomes Tax Reform Group (LITRG) of the Chartered Institute of Taxation, which provides some useful, detailed guidance for low-income taxpayers.
  • None of these pages mentioned national insurance contributions (NICs), although LITRG does link to its own separate guidance on NICs in a sidebar.

Returning to the question, a Times reader commented:

“Question 4: The answer is £8,632 which is the threshold for paying the 12% income tax known as national insurance. If they cannot get the wording of the questions right it’s not surprising if some people don’t answer them correctly.”

Income tax and NICs are two different things with their own sets of rules, but they are both deducted from pay. NICs still have an insurance element, but they have become widely regarded as a tax. The Office of Tax Simplification has said that income tax and NICs are:

“… the two taxes that directly affect the largest number of individuals.”

“… the taxes [people] are most likely to think about.”

The system of national insurance credits for income below the NIC threshold, and the impact of additional income on universal credit and other benefits, add even more complexity for low-income taxpayers.

This complexity means that most quick-fire questions** and answers are likely to be over-simplified and mislead the reader, whose “ignorance” can be forgiven because, let’s face it, tax is not the most absorbing thing, and people have other priorities to think about. We may need better guidance, but we also need a better system.

** When did you last hear a tax question on The Chase?