Should Tax and National Insurance be merged?

Earlier in 2016 the Office for Tax Simplification (OTS) published a report to government regarding the possibility of aligning income tax and National Insurance contributions.

The executive summary sets out seven key steps towards closer alignment:

  1. moving to an annual, cumulative and aggregate basis for NICs
  2. basing employers NICs on whole payroll costs and renaming the charge
  3. aligning the self-employed NICs more closely with the employees’ NICs – and benefits
  4. improving transparency for NICs and the contributory principle
  5. aligning the definition of both earnings and expenses for income tax and NICs
  6. bringing taxable benefits in kind into Class 1 NICs
  7. having a joined up approach for income tax and NICs laws and practice

The report contains six initial summary chapters each of which is supported by a later chapter with further more detailed analysis. The report also has annexes summarising the over 600 responses to the OTS’s surveys on income tax/NICs as well as some sample views of those contributing to the OTS’s extensive researches and evidence gathering.

The OTS highlighted the inconsistencies and costs of the current system of running Tax and NI laws in tandem as demonstrated in the following diagram from the report.

Tax and NIC flowchart

One of the major changes proposed was the aligning of rates and allowances for tax and NI  so HMRC would need to issue employees an NIC code and operate this in a similar manner to the current tax code system. This as suggested above would create winners and losers amongst taxpayers:

Tax and NIC winners and losers

Due to the effect of combining all incomes before calculating NIC deductions, any person with more than one job and earning over £20,000 will likely pay more than they currently do. OTS estimates put 5.5 million worse off, but show that 7.6 million would be better off.

The report stops short of merging the two pay deductions, acknowledging that it would be ultimately simpler to do so but the government has requested to keep them separate due to the differing purposes of each. An implementation plan spread over five years has been proposed.

At present the report is for information only but the government have expressed an ongoing desire to simplify the tax system and the doubling of legislation with tax and NI seems an obvious place to start. Caution will need to be taken when unpicking some of the more arcane legislation that it doesn’t introduce further unintended consequences. If you have any questions around taxation or National Insurances contact your local Burgis & Bullock office on 0845 177 5500 or use our on-line contact form.

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