Executive Summary
National Insurance (NI) was originally established as a contributory insurance system to fund unemployment support, pensions and healthcare. Over time it has evolved into what is effectively a second tax on employment, increasing the cost of hiring workers while creating confusion about what contributions actually fund.
This policy proposes a gradual replacement of National Insurance with transparent, ring-fenced social insurance contributions that directly fund specific public services and protections. Rather than paying into a single tax, employees and employers will know exactly what each contribution pays for.
The first stage of reform reduces employer National Insurance for young workers to encourage employment and apprenticeships. The second stage creates a National Redundancy Insurance Fund that replaces unemployment benefits with an earnings-related insurance system. Future phases will replace the remaining elements of National Insurance with dedicated contributions for pensions and health and social care, ultimately allowing National Insurance to be abolished.
The Problem
National Insurance no longer operates as a true insurance system.
Although many people believe their contributions directly fund the NHS, State Pension and unemployment benefits, National Insurance revenue is largely treated as part of wider government finances.
At the same time, National Insurance has become a significant tax on employment. Employers pay substantial contributions for every member of staff they employ, increasing the cost of recruitment and reducing the resources available for higher wages, investment and training.
This burden falls particularly heavily on labour-intensive sectors such as hospitality, retail, tourism, manufacturing and social care, where profit margins are often relatively low.
The current unemployment system also relies on general welfare rather than a genuine insurance model, weakening the link between contributions and entitlement.
A modern economy requires a modern social protection system that is transparent, sustainable and encourages employment rather than taxing it.
Objectives
This policy aims to:
- Gradually abolish National Insurance.
- Replace National Insurance with transparent, ring-fenced social insurance contributions.
- Reduce the tax burden on employment.
- Make it cheaper for employers to recruit young workers.
- Restore the principle that social protection should operate through genuine insurance rather than general taxation.
- Increase transparency so taxpayers understand exactly what they are paying for.
- Reduce long-term welfare dependency while providing stronger short-term financial protection following redundancy.
- Create sustainable long-term funding for health, pensions and social care.
Policy Details
Phase Zero – Reduced National Insurance for Young Workers
The first stage of reform focuses on helping young people enter the workforce.
Employer National Insurance Contributions for employees aged 16–25 will be reduced by 50%.
Young people frequently face barriers when entering employment because employers must invest time and money in training inexperienced staff. Lowering the cost of employing young workers will encourage businesses to recruit apprentices, trainees, graduates and school leavers while helping to tackle youth unemployment and long-term skills shortages.
The policy will apply across every sector and region of the United Kingdom.
As National Insurance is gradually reduced for all workers under future reforms, the employer contribution for workers aged 16–25 will always remain 50% of the standard employer rate until National Insurance is fully abolished.
Example
If the standard employer National Insurance rate is 10%:
- Employees aged over 25: 10%
- Employees aged 16–25: 5%
If future reforms reduce the standard rate to 6%:
- Employees aged over 25: 6%
- Employees aged 16–25: 3%
Phase One – National Redundancy Insurance Fund
The second stage introduces a National Redundancy Insurance Fund.
Employer and employee National Insurance Contributions will each be reduced by 1%.
At the same time, employers and employees will each contribute 1% into the new National Redundancy Insurance Fund.
This contribution will be legally ring-fenced and may only be used to finance redundancy protection and the operation of the scheme.
Unlike today’s welfare system, this will operate as a genuine social insurance programme where workers contribute towards earnings protection should they lose their job through redundancy.
Single National Provider
The fund will operate through a single national provider rather than competing insurance companies.
Pooling risk nationally reduces administration costs, ensures every worker receives equal protection and avoids the financial instability that could occur if multiple insurers were exposed to the same economic downturn.
The provider will operate independently of government under legislation, with independent governance, annual audits and strict financial regulation.
Fund reserves will be invested conservatively in low-risk assets to ensure long-term sustainability.
Redundancy Payments
Employees made redundant will receive:
- 80% of their previous salary.
- Paid for up to twelve months.
- Followed by a six-month tapered reduction.
- Maximum support period of eighteen months.
Payments will remain conditional upon actively seeking work and accepting suitable employment opportunities.
The purpose of the scheme is to provide financial security during periods of unemployment while encouraging a prompt return to work.
Transition Arrangements
A transition period will be required while the existing unemployment benefit system is phased out.
Individuals aged over 25 who are already receiving unemployment-related benefits will transfer onto the new redundancy insurance framework using the equivalent of full-time National Living Wage earnings as their insured salary.
This means they will receive:
- 80% of National Living Wage earnings for twelve months.
- A six-month taper.
- A maximum support period of eighteen months.
This transition will require significant short-term government expenditure but will remove the long-term structural cost of indefinite unemployment support and establish a consistent national system for future claimants.
Support for people who are unable to work because of disability, long-term illness or caring responsibilities will continue through separate welfare programmes.
Phase Two – Pension Reform
The pension element of National Insurance will gradually be replaced with mandatory private pension provision.
Employees will make a minimum contribution into a workplace pension scheme, while employers will be encouraged through tax incentives and labour market competition to match or exceed those contributions.
This will strengthen retirement savings while increasing transparency over pension funding.
Phase Three – Health and Social Care Contribution
The remaining health element of National Insurance will be replaced by a dedicated Health and Social Care Contribution.
Employers and employees will each contribute a fixed percentage of earnings into a legally ring-fenced fund that may only be used to finance:
- The National Health Service.
- A new National Social Care Service.
Creating a national social care service will remove responsibility for adult social care from local authorities and establish a consistent, nationally funded system across the United Kingdom.
Long-Term Vision
Once these reforms have been implemented, National Insurance will no longer be required.
Instead, employees and employers will make transparent contributions towards clearly defined social insurance programmes, ensuring taxpayers understand exactly what they are funding while reducing the distortion that National Insurance places on employment.
Benefits
This policy would:
- Make it cheaper for businesses to employ young workers.
- Encourage apprenticeships and workplace training.
- Reduce youth unemployment.
- Restore the original insurance principle behind unemployment protection.
- Provide significantly stronger financial support for workers who lose their jobs through redundancy.
- Reduce long-term welfare dependency.
- Increase transparency in taxation.
- Improve public confidence through ring-fenced funding.
- Reduce payroll taxes over time.
- Support long-term economic growth by reducing the cost of employment.
Implementation
Years 1–2
- Introduce the 50% employer National Insurance reduction for workers aged 16–25.
- Begin monitoring employment and apprenticeship growth.
Years 2–4
- Reduce employer and employee National Insurance by 1%.
- Establish the National Redundancy Insurance Fund.
- Begin collecting contributions.
- Transition new redundancy cases onto the insurance scheme.
Years 4–6
- Complete the transition from unemployment benefits to the redundancy insurance system.
- Review contribution levels and fund sustainability.
Years 6–8
- Introduce mandatory pension contribution reforms.
- Begin replacing the pension element of National Insurance.
Years 8–10
- Introduce the dedicated Health and Social Care Contribution.
- Complete the transfer of adult social care into a nationally funded service.
- Abolish National Insurance and replace it entirely with transparent, ring-fenced social insurance contributions.
Frequently Asked Questions
Why abolish National Insurance?
National Insurance no longer functions as a true insurance system. It has become an additional payroll tax while creating confusion about what contributions actually fund.
Why reduce National Insurance for young workers?
Young people often struggle to gain their first job because employers face the costs of recruitment and training. Lower employer National Insurance makes it more attractive to hire young workers and apprentices.
Why create a single redundancy insurance provider?
A single national provider pools risk across the entire workforce, avoids unnecessary administration costs and ensures every employee receives equal protection.
Is this a reduction in unemployment support?
No. The policy provides significantly higher short-term income protection following redundancy while encouraging a faster return to employment.
What happens after eighteen months?
The redundancy insurance scheme is intended as temporary earnings protection rather than permanent income support. Separate welfare arrangements will continue for people who are unable to work because of disability, illness or caring responsibilities.
Will contributions be protected?
Yes. Every contribution will be legally ring-fenced so it can only be spent on the purpose for which it was collected.
Criticisms
“The transition will be expensive.”
The transition requires significant upfront investment, but it removes the long-term structural cost of indefinite unemployment support and creates a sustainable insurance model for future generations.
“A single provider could become inefficient.”
Strong independent governance, statutory regulation and regular audits will ensure accountability while avoiding the duplication and instability of competing providers.
“The fund could struggle during a recession.”
The fund will build reserves during periods of economic growth and invest conservatively in low-risk assets. Independent actuarial reviews will ensure contribution levels remain sustainable over the long term.
“Lower National Insurance will reduce government revenue.”
The policy replaces National Insurance with transparent, ring-fenced contributions rather than removing funding altogether. Over time, lower payroll taxes are expected to support employment, wages and economic growth.
Supporting Documents
References
- HM Treasury – National Insurance Contributions.
- HM Revenue & Customs – National Insurance guidance.
- Department for Work and Pensions – Employment and welfare statistics.
- Office for National Statistics – Labour market data.
- OECD – Employment Outlook.
- International Labour Organization – Social insurance systems.