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.”
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.”
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.”