Wednesday, August 17, 2011

BLOG 110


In order to keep my knowledge up to date I read a lot. In particular I read a lot about tax and other things that are vaguely related to tax. Every so often I come across an idea that is so good that I want to share it with others.

National Salary Insurance is an idea put forward by Graeme Cook in a paper for the Institute of Public Policy Research (IPPR). Mr Cook is concerned that currently Job Seekers Allowance is at a flat rate of £67.50 a week. He thinks this a miserly amount to tide people over when they lose their job and are looking for a new one.

So do I. I hadn’t realised that it is so low. Indeed in the context that the State believes that a pensioner, who normally no longer has to support children and is likely to have repaid his mortgage, should receive £100 a week State pension, it is obscenely low.

Mr Cook’s idea is very simple. He suggests that for the first six months of unemployment, Job Seekers Allowance should be 70% of the individual’s average earnings subject to a cap of £200 a week, with the extra £132.50 a week (or whatever the excess over £62.50) being repayable when the individual gets back into work.

Mr Cook says that around 60% of people who claim Job Seekers Allowance are unemployed for less than three months and 80% for less than six.

Under his scheme the maximum loan is £3,445. Repayment would be by deduction from salary in the same way as with student loans. A person would not start repaying until he earns more than the primary NIC threshold (currently £139 a week). Mr Cook does not say a lot about repayment but it might be sensible to base this on a percentage of earnings in excess of £139 with the individual having an option to repay more quickly. Repayment at the rate of £20 a week would clear the loan in a little over three years; at £30 it would take a little over two. If a person became unemployed again before the loan was repaid, he could get the £200 figure again but only for such a period as would limit his total loan to £3,445.

Mr Cook has analysed the new Job Seekers Allowance claims for 2010 between different occupations. There were 3.8 million claims. The median average earnings for all claimants was £388 per week, so a £200 cap leaves a significant incentive to find a new job fast. £200 is 70% of £286 (or £14,872 p.a.). However Mr Cooke seems to have ignored tax. He envisages the £200 being tax-free. Earnings of £14,872 would attract roughly £1,480 income tax and £840 NIC giving a net figure of £12,552 or £241 a week so £200 would be 83% of net earnings. However I don’t want to quibble about the arithmetic. The important thing is the concept.

Interestingly, Mr Cook’s analysis shows that the median wage in most occupation is well over £286 a week. The £286 figure would give 70% of earnings to only 1.35 million of the 3.8 million claimants, although another 1 million were on around £300 a week. Accordingly a £200 figure would still leave most claimants struggling financially.

The scheme would also provide a fairly strong incentive to find a new job. I believe that average earnings is currently around £25,000, or £480 a week. Taking off income tax (£3,505) and NI (£1,950) leaves £19,045 or £366 a week. Accordingly a person on average earnings would experience a drop in net income from £366 to £200 and, if he was still unemployed after six months, to £62.50. The six-month period gives time to adjust; the risk of the subsequent drop to £62.50 (plus of course means-tested benefits as appropriate) gives a powerful incentive to find a job in the six-months window.

Of course if a person is never re-employed, the State will suffer a bad debt in respect of the loan. But if 80% of people find new work within the six-months window – and some of the other 20% will find work subsequently – this is probably not a massive burden on the State.

I think that this is a great idea. Unfortunately the IPPR is a left of centre think tank, so I doubt that it’s ideas generally find favour with Mr Osborne. However this is not yet another way for do-gooders to spend taxpayers’ money. It is a sensible solution to the real social problem of unemployment pushing families into poverty. As such I hope that someone can persuade the government to look at it. If you want to know more about Mr Cook’s National Salary Insurance, you can download his paper for free from the IPPR website,



Post a Comment

<< Home