The pension industry has poured cold water on a proposal to abolish National Insurance contributions in a bid to bring the tax regime up to date.
Think-tank the Centre for Policy Studies has called for NICs to be replaced by a single “earnings tax” with basic, higher and additional rates of income tax set at 32, 42 and 47 per cent respectively. The shortfall from the lack of employer contributions would be made up with “additional consumer taxes”.
While there is broad support for a simplified tax system, experts say implementing the changes would not be easy given the Government has little to gain from the move.
In its report published last week, the CPS says the National Insurance Fund, where NICs are banked, could be “exhausted” by next year, 20 years earlier than the Government Actuary Department’s recent prediction.
Report author Michael Johnson says the GAD’s 2035 estimate is based on “seriously flawed” assumptions, including over-optimistic predictions of long-term earnings growth. He says there would be “no remaining justification” in retaining NICs once the fund is emptied.
Johnson adds the “symbolic significance” of this confirms that the new single-tier state pension system is “unsustainable” without future retirees suffering less generous benefits and higher taxes.
Landmark Financial Solutions managing director Colin Jelley says “the tax system for earned income is pretty confusing”.
He says: “Simplification is always a great aim but we’ve seen people try to simplify things before and not always successfully. It’s worth spending time looking at National Insurance but the question is whether there’s political will and there certainly isn’t this side of the election.”
Standard Life head of corporate strategy and propositions Jamie Jenkins says: “Simplifying the tax regime seems sensible because National Insurance doesn’t serve the purpose in people’s minds that it once did.”
While Jenkins says the change would not be a strain on the industry, Hargreaves Lansdown senior analyst Laith Khalaf says a merger would “probably be bigger” than the upheaval of moving to the single-tier state pension.
Aviva head of pensions policy John Lawson says: “This idea has never really gone anywhere, probably because it’s quite difficult to do. There are a lot of moving parts which could cause problems.
“National Insurance and income tax start at different rates. Currently, when you have income above the lower earnings limit, you gain entitlement to things like the state pension, even though you might not be making NICs. If you got rid of NICs, would you give state pension entitlement to those earning less than the threshold of the new tax? You also have to have a separate pensioners’ tax. Once you factor all these in, does it make things simpler?”
Almary Green managing director Carl Lamb says advisers would welcome simplification of an “overcomplicated tax system” and removal of the Government’s ability to raise taxes “by the back door”.
On the CPS’s claim that the new single-tier pension is unsustainable, Lamb thinks the UK could eventually follow the example of New Zealand, where a means-testing system excludes the wealthy from the state pension, keeping costs under control.