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Osborne resurrects plans to merge income tax and national insurance

Proposals to merge income tax and national insurance are to form a key plank of the next Conservative manifesto.

The Times reports that Chancellor George Osborne is being urged to roll together NI with income tax, and that the plan is actively being considered by Downing Street.

A source told the newspaper the Government came “within a whisker” of implementing the plan at the last Budget, but stopped short because the risk was said to be too great.

The Office of Tax Simplification first suggested merging NI contributions and income tax in March 2011. The Treasury announced it would consult on the reforms a year later, before pushing back the consultation. Advisers said the complexity involved in integrating the two systems would see the reforms “kicked into the long grass”.

The Times says the Chancellor believes NI is a “stealth tax” as it can be raised without causing public outrage.

Under the proposed merger, the amount paid by workers on the basic rate of income tax would go from 20 per cent to 32 per cent, while the amount paid by higher rate taxpayers would go from from 40 per cent to about 52 per cent, with 2 per cent added to earnings above £42,000.

Sources said one simpler tax system would encourage public understanding of the system, and work alongside plans to give workers a breakdown of how their taxes are spent.

One source told the newspaper: “We came within a whisker of doing this at the last Budget, but in the end we decided against it. They are currently on two separate computer systems and we thought the risk was just too great. But it Is something we could do in the next Parliament.”

They added: “Some people think it is a cynical attempt by politicians to ensure pensioners keep paying national insurance, but it is not. Your tax rate would automatically reduce if you are a pensioner.”

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Comments

There are 10 comments at the moment, we would love to hear your opinion too.

  1. Can just see Tory Pensioners – who don’t pay Ni – really going for this.

  2. Soren Lorenson 30th June 2014 at 9:34 am

    What will happen to dividend taxation? Will it also increase? If so, I can’t see the Tories small business owners backers accepting this.

    However, done well, losing NI could be simpler and fairer.

  3. Natalie quotes “Under the proposed merger, the amount paid by workers on the basic rate of income tax would go from 20 per cent to 32 per cent, while the amount paid by higher rate taxpayers would go from 40 per cent to about 52 per cent, with 2 per cent added to earnings above £42,000.”

    Under current tax law, an individuals’ NI rate reduces from 12% to 2% on earnings greater than £41,865 giving a combined tax rate of 42% on earnings above this figure. Therefore I’m not sure what the proposed 52% applies too unless the Government is suggesting higher rate tax payers are going to have to pay an extra 10% on earnings above the Upper Earnings Limit.

    Can someone clarify.

    Thanks,

    Mark

  4. They should leave the Pensions separate from taxation in my view and should also keep it away from benefits, leaving it as a totally separate issue. It is not as freebie but is paid for. It’s easy to disguise changes when mixed with other non related items and the politicians make a mess of what they have already.

  5. Grey Haired Underwriter 30th June 2014 at 4:15 pm

    Just a way of getting pensioners to pay more income tax. A stealth tax by another name?

  6. They added: “Some people think it is a cynical attempt by politicians to ensure pensioners keep paying national insurance, but it is not. Your tax rate would automatically reduce if you are a pensioner.”

    My comment is that it appears to be exactly that, namely a cynical attempt to increase taxation by stealth. Who are the ‘theys’ anyway? People who don’t want to be confronted with difficult questions, it would seem.

  7. In “Yes Prime Minister” when Sir Humphrey said “a courageous decision Prime Minister” it was code that he thought the proposal was downright stupid. I suspect that the Permanent Secretary at the Treasury has been using that phrase today.

    It sounds an obvious thing to do but as the other comments have shown it opens up a can of worms. The Government has said there would be a lower rate for pensions but at what age? Would it apply to any pension or would it only come into effect at state pension age? Would drawdown income be classed as pension income?

    Will it apply to interest payments on deposit accounts? Good luck with that one.

    If you introduce a new category, “earnings tax” that could be politically difficult if it is clearly seen that you pay higher tax from income received from work than investment. (Older readers may remember we used the have the concept of “non earned income” which carried a higher rate.) Yes I know that is the case today but NI obscures this point. Be careful that you get what you wish for.

    I suspect when Osborne’s Sir Humphrey points these issues out the whole proposal may be quietly forgotten.

  8. I’m all for simplcity IF the outcome is cost neutral to tax payers.

    I suspect that this could be done in conjunction with standardising Pension Tax Relief (otherwise employee pension contributions suddently result in a drop in Tax Take by the Government given that they would essentially become exempt from the ‘what was’ NI.

  9. The tax system in this country is unnecessarily complicated, probably as a result of having different rules implemented in some shape or form for hundreds of years.

    Simplification of the system in it’s ideology is a good thing but as some comments above suggest that may not be what we get. If tax deductions are made clearer too the public Mr Osborne may find more members of the public complaining about it. “What do you mean i’m paying for his pension!!!!”

  10. Income tax raises £150bn pa, NICs 100bn, VAT the same and Corporation Tax less than half thast.

    If you want to remove NICs and keep the burden spread roughly the same you’d double or treble Corporation Tax (Employers NIC) and add 1/3rd to Income Tax.

    If you want to reduce the impact on pensioners you’d have to reinstate the age-related allowance and make it c£15,000.

    All doable, many winners and losers so lots of pain.

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