OTS announces possible combination of NI and income tax

Thursday 23 July 2015

The Office for Tax Simplification (OTS) has put forward new plans to combine National Insurance Contributions (NICs) and income tax into a single payment, in a bid to make the system easier to understand.

In fact, the financial secretary to the Treasury David Gauge described the present system as a “major source of complexity for taxpayers” in his letter initiating the report.

The changes were first proposed by the chancellor George Osborne. The OTS initially suggested that the two systems could be better aligned in 2011, after a historic review found the parallel systems were responsible for unnecessary confusion and bureaucracy. Now the terms of reference have been published, the organisation is set to deliver a report on the subject ahead of next year’s Budget.

National Insurance has existed alongside income tax since 1911, when it was established to provide workers safety net in the event of unemployment or illness, as well supporting a universal state pension. It was later extended to help fund the NHS, and has continued to the present day.

This review will include an analysis of the potential costs and benefits of the proposals, as well as the impact a new system would have on compliance burdens and bureaucracy for employers.

However, concerns have been raised that the change may disproportionately affect contractors and self-employed workers, who currently pay NICs at a different rate to those who are employed. High earners would be particularly hard-hit, as they currently pay relatively low NICs, but have a lower benefit entitlements. However, plans to scrap the 45 per cent top rate of tax may offset this change somewhat.

Head of the Association of Chartered Certified Accountants (ACCA) Chas Roy-Chowdhury said: “The fact is, however, that the government has been here before a number of times, and a great deal of work went on to explore the potential of the merge, but there simply hasn't been the political will to get the initiative over the line."

"Therefore the danger is that unless the government recognises that the merger will cost the Treasury money, it will end up becoming another tax ‘reform' that actually increases contributions from the taxpayer, which ACCA could not support."

At present, HMRC currently makes five million erroneous tax demands every year. It is still being debated whether a new system would help cut down on this figure, or create an extra burden that could damage its ability to function.

If the two rates are combined, the Independent suggests that the single rate, possibly known as “earnings tax”, would be about ten per cent higher than present levels of income tax.
As a more detailed report is still ongoing, it is unclear whether the move will be a net benefit or detriment to contractors, freelancers and the self-employed. However, it is a change that will require monitoring to ensure that contractors can structure and organise their companies as effectively as possible, whether as a sole trader, limited company, or working through an umbrella organisation.

By Victoria McDonnell

Get in touch

Please select your type of enquiry:

Brookson on Twitter