Govt plans to merge NI and income tax

Tuesday 1 July 2014

A future Conservative government could see income tax and National Insurance (NI) merged in a bid to simplify the tax system.

It has been reported that the plan is currently being considered for inclusion in the Tories' general election manifesto.

Officials believe that by merging the two levies it would be clearer for taxpayers how much of their earnings they're handing over to the state.

If the plans were enacted it would mean the biggest change to the tax system for decades and it is believed that the merger may be called 'earnings tax'.

Chancellor George Osborne came close to approving the amalgamation of income tax and NI prior to this year's Budget, it is understood by The Independent, but made a u-turn due to problems with integrating computer systems.

Basic-rate taxpayers will hand over 32 per cent of earnings under the changes, while higher-rate payers will forgo 52 per cent of earnings.

It is believed employers will continue to pay the same national insurance if the government's plans come to pass.

For contractors and the self-employed, the simplification of the tax system will no doubt be welcomed. Indeed, merging income tax and NI contributions is likely to make compliance easier and lower administrative burdens.

Andrew Fahey, commercial director at Brookson, said: "There has been talk of merging income tax and NI for a while. It is a move that would simplify compliance for the self-employed and help them understand what their tax obligations are. However, should the changes come to fruition, it will be important that the government provides clear guidance on the new system and ensures no one loses out. The changes must recognise the employment benefits that the flexible workforce gives up and ensure their tax contributions don't increase as a result of combining NI with income tax."

Nevertheless, transparency over what is being paid to the taxman will likely be appreciated. Mr Osborne has already taken steps to shed light on where levies go and from October 2014 24 million people will receive personal tax statements explaining how much of the levy was paid in the previous year and the role it played in public expenditure,

PAYE taxpayers who have received recent contact from HM Revenue and Customs about how to set out tax calculations earlier in the next tax year are expected to find the new documents helpful. This is because those paying PAYE generally have more complicated or changing circumstances.

"These tax statements represent a huge boost for tax transparency, showing people very clearly how much tax they pay and giving them a better understanding of where their money is spent," Mr Osborne said.

However, the government's latest plans for improving transparency may not be seen as a means of simplification by all. Indeed, a source told the Independent that pensioners, who do not pay national insurance, may view the changes as a means to make them pay the levy.

"Some people think it is a cynical attempt by politicians to ensure they keep paying national insurance, but it isn’t," the source said.

John Mann, Labour member of the Commons Treasury Select Committee, disagrees, however. He told the newspaper that the plans would be "disastrous" and could undermine the NHS, which NI is known to contribute towards.

"People understand national insurance is covering social welfare, not least the NHS. Merging it with tax would be a long-term way of undermining the NHS. It’s the sort of thing the Tea Party would come up with in the United States," he said.

By Victoria McDonnell

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