Government sets out plans to integrate NI and income tax

The Government has stopped short of a full merger of national insurance and income tax as ministers examine proposals to integrate the two systems.

The Treasury issued a call for evidence in July this year following a report from the Office of Tax Simplification highlighting the case for integrating national insurance contributions and income tax.

In its formal response to the call for evidence the Treasury says there is a “clear appetite for reform”, with most responses focused on making the system of national insurance more like income tax.

The Treasury says any reforms are likely to focus on “alignment, simplification or operational integration” rather than a complete merger of the two systems.

It says: “The Government will maintain the contributory principle that underpins national insurance. Those in employment will continue to pay or be treated as paying national insurance in order to receive financial support while out of work, whether through illness, unemployment or in retirement. As such, NICs will need to retain an identity distinguishable from income tax.

“National Insurance will remain a charge on the earnings of working-age individuals. The Government does not intend to extend NICs to other forms of income such as pensions, savings and dividends. The Government sees NICs as remaining a system based on payments from employment earnings, in return for replacement earnings when out of work. Nor does the Government plan to extend NICs to individuals above state pension age.”

Treasury Exchequer Secretary David Gauke says: “We are exploring ways in which we could integrate the operation of income tax and NICs, with benefits for employers and employees.

“The Government will be working in partnership with external stakeholders to identify options and will report on progress at Budget 2012.

“Our vision is to transform the customer experience of the personal tax system.”