NI reforms `should mean lower minimum wage'

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THE HEAD of the Government's tax and benefit review is urging the Government to bring in a low minimum wage, claiming it is justified by radical reforms of National Insurance adopted in Tuesday's Budget.

In a little-noticed paragraph in his report on modernising the tax and benefit system published this week, Martin Taylor said: "I believe [the reforms] considerably increase the attractions of offering and taking low-paid work.

"Combined with a low starting rate of income tax, this should so increase the financial attractiveness of low-paid jobs as to allow the minimum wage to be set at a lower level than would otherwise be the case. I urge the Low Pay Commission to take this reform into account in their deliberations."

The report drew a lukewarm response from employee benefit experts who pointed out that in many cases the reforms would lead to higher national insurance contributions (NICs) for low-payers. Under Mr Taylor's reforms, an employer paying pounds 150 a week - a possibility under a national minimum wage - would contribute pounds 8.42. That compares with pounds 7.50 under the current system.

John Whiting, an employee benefits expert at Price Waterhouse, the accountancy firm, said: "There are a lot of employers who, once they sit down and work out the numbers, are going to find they are paying more. Arguably, this is a step in the wrong direction."

According to the Institute of Fiscal Studies, higher employer NICs will sometimes be offset by the abolition of the "entry fee" for employee's NICs. The entry fee requires employees to pay contributions worth 2 per cent of all their wages when they earn just over pounds 64.

The reforms will boost employer contributions for high earners by approximately 2 per cent - a tax rise which is expected to be passed on to employees.

IFS verdict on NICs, page 27