National Contributions (NC) is the flagship revenue reform policy in the Prosperity 2030 programme. NC is much more than a mechanical re-arrangement of rates and flows, it is a reform designed to embody reciprocity and cement solidarity. The primary purpose is to strengthen the connection between the benefits and obligations of citizenship by making the reciprocal link clearer.
NC is a single tax on total personal income, replacing six current taxes, following a Progressive Rate On Flat Income, Linked to Everyone (PROFILE) design. The higher a person’s total income, the higher the rate of tax. The rates are anchored to the median income in the country, so rates are lower for half of all taxpayers, and higher for the other half with larger incomes. As median income changes, the system adapts automatically and mechanically.
NC is a tax on receipts. It does not differentiate between the type or source of the receipt. So long as it is a monetary value received, it is subject to NC in that year – that is what is meant by “Flat Incomes” in the PROFILE design. NC replaces Income Tax, Capital Gains Tax, Dividend Tax, Inheritance Tax, and Employee and Self-Employment National Insurance.
There are no ‘tax free’ allowances, all income received is subject to NC tax. Because everyone is a beneficiary of the country’s services and structures, so everyone makes a National Contribution from their private income. There is a level below which paying NC is voluntary, but if that contribution, however small, is paid, then that year counts as a “stamp” for the individual’s State Pension entitlement.
The government sets just two rates and a threshold: a Base Rate, a Top Rate, and the Voluntary threshold. The Base Rate is progressively applied up to the median income in the middle of the population. The Top Rate is then progressively applied from the median up the 90th percentile, and then flat on the top 10% of incomes. The result is a smooth, escalating rate profile from the lowest to the highest incomes, with no cliff edges and no steps.
This structure means that if your income falls relative to everyone else, your rate of tax will go down and you will pay less tax. Conversely, if your pay goes up and everyone else’s does not, then you will pay a higher rate of tax on your income next year.
From one perspective: the more a company pays their workers, the lower the boss’ taxes will be.
A simpler system of raising revenues has many additional advantages, including removing cliff edge disincentives and eliminating classification arbitrage. But the biggest gain from reform is breaking free from the gear-jam that prevents effective revenue policy. Governments complain that the levers of power are disconnected from the mechanics of government, but that is a feature of antiquated design, not a necessary configuration.
Revenues are needed to fund the required upgrades to social fabric, but those revenues are only available once taxation, especially personal income tax, has been simplified and restored as the principle of reciprocity on which the social contract rests.
Revenues
National Contributions raises tens of billions more than the six taxes it replaces, and the whole of that comes from taking a slightly larger share of total income, not from a charge on any one source. This is the point most often misread, so it is worth setting out as plain arithmetic.
| £bn | Share of income | |
|---|---|---|
| Total personal income | 1,912 | |
| Taken by the six taxes replaced | 392 | 20.5% |
| Taken by National Contributions | 470 | 24.6% |
| Net additional, matured | 78 | +4.1% |
| less inheritance still phasing in (five-year window) | (3) | |
| Net additional, in the programme window | 75 |
The additional revenue is a little over four percentage points of a personal income base of about £1,900 billion. It is not a levy on capital or on wealth. The capital gains, dividend, and inheritance tax bases are too small to produce a sum of this size.
That increase has two parts. About two-thirds is the higher rate falling on income already taxed today: because the rate is set by a person’s total income, every pound of earnings, dividends, savings, and gains is charged at that combined rate rather than on its own schedule. About one-third is base-broadening. NC brings roughly £185 billion a year of inheritance and other irregular receipts into the income base, flows that today raise about £8 billion of Inheritance Tax and no income tax. Taxed as income to recipients and dispersed over the withdrawal window at moderate rates, that broader base accounts for the remaining third. The contrast is between taxing £185 billion of flows as income compared to the £8 billion currently collected on those flows.
By income level the effect is unambiguous and depends on no modelling assumption: about four-fifths of the additional revenue falls above the median, three-fifths on the top quintile, and two-fifths on the top decile, with the change close to neutral below the median. Most of the extra money is higher earners paying a higher rate on their total earnings, not a tax on wealth.
The Macro Cashflow carries the conservative in-window figure of about £75 billion, some £3 billion below the matured £78 billion, because inheritance revenues phase in over ten years and only the earliest cohorts fall inside the programme’s five-year frame. The Fiscal section states values as percentages of GDP because pound figures would carry real modelling uncertainty that obviates greater precision.
Rates
In the model used for this report, the Base Rate is set to 22% and the Top Rate is set to 46%. These rates cannot be directly compared to current Income Tax rates because the rates change as relative income changes, and NC also replaces other taxes, including employee NICs, Capital Gains Tax, and Inheritance Tax.
The rates selected for this report fund all parts of the P2030 programme, as well as creating the targeted fiscal space beyond the policies included in the programme. The main categories of expenditure funded from National Contributions are:
- Universal Services
- Stamp Duty abolition
- Structural reforms
- Fiscal space
1 for 6 : Tax Simplification
There are well documented problems with the UK’s current system of taxing incomes and gains1. Those are reasons enough to reform taxation. In addition, co-ordinating reforms of taxation with social support creates opportunities to tackle obstructions and disincentives in the wider tax system. Tax reform is needed any way, and this programme takes the opportunity to make those reforms.
National Contributions (NC) was first advanced in an IGP report2 in 2021 and this report adopts the same design principles: first change what is taxed, and then apply a simplified rate structure.
NC replaces six current taxes: Income Tax (IT), employee and self-employment NICs (NICS), Dividend Tax (DIV), Inheritance (IHT), and Capital Gains (CGT) taxes. NC eliminates these distinctions, reclassifying them all as income flows. That is the change to what is taxed.
NC applies a progressive rate structure to the flat definition that includes all income. The rates are anchored to the median income, providing stability and consistency. A Voluntary National Contributions (VNC) threshold sets the income below which remittance is voluntary, but if made, allows the year to qualify for State Pension entitlement. (The model used for P2030 does not rely on any revenues from incomes below the VNC threshold.)
