A major consultation on the alignment of income tax and national insurance contributions has found the latter system is “no longer fit for purpose” and may herald the announcement of an overhaul at next week’s Budget.
The Office for Tax Simplification paper, published this week after being first launched by Chancellor George Osborne last July, does not go as far as calling for a unification of the two taxes, instead focusing on a redrafting of NI rules.
OTS figures show that under the current regime, self-employed workers earning £65,000 would be £3,000 better-off than an employed person on the same salary.
The OTS says: “The key change in many ways is to improve transparency around NICs in particular: that greater transparency will encourage taxpayers to understand the contributory system and make informed choices.
“Together these changes will remove distortions and make the system more equitable – a key desire across all our stakeholders – more understandable and hence simpler.”
Proposals from the OTS include basing employer NI bills on “whole payroll costs” to create a simplified system, with a new tax set at 10 per cent, rather than the current level of 13.8 per cent.
Helm Godfrey chairman Danby Bloch says the proposal could further turn up the pressure on salary sacrifice arrangements.
He says: “This paper could be taking us towards the Chancellor taking a real look at salary sacrifice.”
Old Mutual Wealth pensions technical expert Jon Greer adds: “With major changes to pension tax relief put on hold, we anticipate there is scope for George Osborne to give the green light for an overhaul of national insurance at next week’s Budget.
“This would be a major and long-term undertaking, requiring huge changes to HMRC’s processes, employers’ payroll systems and legislative structures, which would have a dramatic impact on tax, benefits and pay.”