View more on these topics

Govt warned over ‘nightmare’ NIC and income tax merger

Experts have warned proposals to merge income tax and National Insurance contributions will be a “nightmare” to deliver.

This week, it was reported combining the taxes would be included in the Conservative manifesto for the 2015 general election. However, sources close to the party have poured cold water on the idea.

The Office of Tax Simplification, established by Chancellor George Osborne in 2010, has previously suggested merging NICs and income tax although the Government has not taken up the recommendation. 

Tax experts say the reform would be plagued with difficulties. Chartered Institute of Taxation tax policy director Patrick Stevens says: “People aged 65 and over do not pay NICs on their earnings. So to merge NI, the Government will have to either increase the tax charge on all pensioners who still work – and presumably that would include pension income – or introduce a whole other set of rules so you have a lower rate for people aged 65 and over.

“It will be simpler at the end but moving from A to B is going to be a very real nightmare.”

Taxbriefs senior consulting editor John Housden says the biggest problem with the merger is combining the two IT systems which administer the taxes. Problems will also emerge in dealing with the difference in thresholds for the two levies.

He says: “There are over 1 million people who pay no income tax but do pay NICs. So if you only have one rate, where does it start?”

Institute for Fiscal Studies senior research economist Stuart Adam says the abolition of the state second pension is another step towards the end of the contributory principle – the major justification for a separate NI framework.

“Politicians of all stripes tend to pay lip service to the contributory principle,” he says. “It has always been weak and is getting weaker but we are now seeing almost the last real link being removed. So the argument that we should keep them because of that principle is even weaker.”

Stevens says removing the contributory principle would make the merger easier but adds accrued rights would have to be honoured, which would be expensive. He says: “That would only be possible if the country had lots of money to spend. It would be a radical way of simplifying the system but is it too radical?”

Wingate Benefit Solutions corporate adviser Richard Grover says simplicity will benefit employers in the long run but firms are afraid of implementing the changes. He says: “The company is ulti-mately responsible but will need assistance to get it right. Companies are scared of the merger because if they get tax or NI wrong, there could be fines or inspections and it is easy to look like errors have been made on purpose.”

Adviser views

Andrew Swallow Swallow Financial Planning 2014

Swallow Financial Planning director Andrew Swallow

“This idea has been around for 20 years or so and it would be a very welcome move. NICs should have been abolished years ago. It will make the amount of tax people are paying much more transparent.”

Alan Solomons Alpha Investments & Financial Planning 2014

Alpha Investments & Financial Planning director Alan Solomons

“Any simplification is welcome but this is just playing around the edges. We need to start looking at whether we need different rates for things like capital gains and inheritance tax.”

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. Philip Milton 3rd July 2014 at 2:26 pm

    Brilliant idea and long overdue. Am sure processes can be put in place to make for a smooth transition even if it is over several years. How about banning employer NI to start and adding the (net) tax primarily onto corporation tax for a neutral outcome?

    It will be politics which dissuade most – ‘the government which increased Income Tax to x%’ – and it follows that Tax Allowances have now become too generous at the lower end as well.

  2. I’m the last person to criticise attempts to bring NI into the spotlight. Employer’s NI is a nonsense, why tax something that you want to create more of? In this case employment. The treasury has gone some way to addressing this with the NI rebate but it simply shifts the disincentive effect further up the value chain it doesn’t remove it but it is nonetheless a bold and welcome start.

    Employees Ni is a different matter entirely much if not the majority of the population believe that it pays for both the BSP and the NHS. It does neither and hasn’t been a hypothecated tax in decades.

    I did a rough calculation in my head over breakfast and came to a figure of £1.8trn as the amount that would be needed to pay the index linked annuities of current BSP claimants rather than PAYG as we currently do. This of course doesn’t include unfunded Public sector pensions. The problem is a lot bigger than just merging to income taxes.

  3. “It will be simpler at the end but moving from A to B is going to be a very real nightmare.”

    And that is exactly why it (or indeed anything) should be done – simplicity. Government just needs to employ “can do” people who don’t moan about how tough change is.

  4. It should not be a nightmare if the rates are adjusted over time, I don’t think anybody is suggesting this will occur at the stroke of a pen. Do this by bringing NI rates down to zero, like zero rate VAT then NI is effectively abolished. The NI collection principle was always temporary when it was introduced in 911. Merging would make the income tax rate appear to rise, but at the moment its dishonest to say that the basic rate is 20%, it give people a more realistic vie of the tax rate they were really paying.

  5. It should not be a nightmare if the rates are adjusted over time, I don’t think anybody is suggesting this will occur at the stroke of a pen. Do this by bringing NI rates down to zero, like zero rate VAT then NI is effectively abolished. The NI collection principle was always temporary when it was introduced in 911. Merging would make the income tax rate appear to rise, but at the moment its dishonest to say that the basic rate is 20%, it give people a more realistic vie of the tax rate they were really paying.

  6. Adam Bellchambers 4th July 2014 at 9:14 am

    Endorse Nick Bamford’s comment completely (simplicity should prevail) – I cannot believe that the two “algorithms” (they’re not even this really!) ie income tax and NIC cannot be combined, implemented on one system (income tax?) and the division/allocation of the spoils dealt with in the background – simple, transparent … with a single infrastructure (including people)

Leave a comment

Close

Why register with Money Marketing ?

Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Money Marketing Events
Be the first to hear about our industry leading conferences, awards, roundtables and more.

Research and insight
Take part in and see the results of Money Marketing's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now

Having problems?

Contact us on +44 (0)20 7292 3712

Lines are open Monday to Friday 9:00am -5.00pm

Email: customerservices@moneymarketing.com