Income tax-NIC integration hits delay

The government has delayed a consultation on options to integrate the operation of income tax and National Insurance Contributions (NICs).

The consultation was due to start after the March Budget after discussions with employers and other groups. But due to the technical challenges involved in integrating the operations of income tax and NICs -- and the potential disruption for employers’ payroll systems - the consultation will now not be held until after the summer, the Treasury said.

“As many stakeholders have recognised, this is a complex issue with potentially significant implications for employers’ payroll operations,” the Treasury said at the end of May.

Tax experts have welcomed the plan to integrate the operations of income tax and NICs but have warned that the project will have to overcome some big technical and administrative challenges.

Plans to integrate NICs and income tax coincide with a separate overhaul of the tax system. A planned move to Real Time Information (RTI) for PAYE records will see employers send the taxman information about tax and national insurance deductions at the same time as they pay their employees, rather than at the end of the financial year. 

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Comments

Why so hard?

Anonymousey | | Permalink

This might be very naive but why can't they just make all NI 0% and increase income tax by an appropriate amount. Would that be so hard?

carnmores's picture

integration first

carnmores | | Permalink

RTI second

 

the above 0% wont be easy to introduce due to the differing earnings  treshholds

 

looks like the alignment of the PA and lower earnings level is a must so that will mean an increase for higher earners 

No NI    1 thanks

davidkirk | | Permalink

Has Anonymousey tried selling that one to pensioners, who don't pay NI?

A bit of history    1 thanks

ken of chesterl... | | Permalink

I know I'm retired, and might have missed something, but I once have a vague feeling that NI was  a form of insurance, originally conceived by Lord Beveridge to fund pensions, the National Health Service and other benefits. The payments they used to take off me were called contributions. Not tax.  If I had taken my staff's pension contributions to pay for a burglar alarm, they would not have been amused. It was often stated in tax journals that the Government thought of NI  as a tax, which they used to deny.  But to pursue my analogy,  this merger is using insurance contributions to pay for defence.  The contributions were towards a specific fund, not to the general exchequer.

The collection procedures might be linked, but the purpose of the two imposts must never be forgotten.   

unfortunately the price that is paid for

justsotax | | Permalink

a 'fair' (ok maybe 'fairer') tax system is complexity......other countries may well use a flat rate tax system (or some dervative of that) but what is their benefits systen like, how is wealth redistributed, how are the poor/elderly helped/assisted......yep simplifying a system is easy - selling it to those who lose the most is a little more difficult.

 

Complexity?

ThornyIssues | | Permalink

justsotax wrote:

a 'fair' (ok maybe 'fairer') tax system is complexity......other countries may well use a flat rate tax system (or some dervative of that) but what is their benefits systen like, how is wealth redistributed, how are the poor/elderly helped/assisted......yep simplifying a system is easy - selling it to those who lose the most is a little more difficult.

Well, lets say ,,,,,, a simplified and lower cost of collection tax system is (on evidence) liable to produce a bigger tax take and thus should not impact "wealth distribution" and provide help for the poor/elderly. TBH, I find "wealth distribution" an odd phase for someone who makes a living out of tax mitigation!

silicondale's picture

NIC at 0% is fine

silicondale | | Permalink

Carnmores - I don't see the problem. make NIC 0% for all thresholds, increase income tax percentages at each tax threshold to yeild the same total tax revenue. If it increases the percentage a bit for higher earners, well perhaps that redresses the balance a bit after the Chancellor's blunder in dropping the top rate to 45%. Changing the rates - even down to zero - doesn't require any change in employers' software. You could even drop the employers NIC to zero as this is just a payroll tax, and the extra employment growth would probably pay for its abolition in reduced commitment to pay jobseekers allowance etc.

davidkirk - As for pensioners (of whom I am one) surely the simple answer would be that we should pay the same rates of income tax as anyone else, but the state pension should be increased to reflect the higher tax rates that would come in with the integration of NIC into income tax. Indeed, at the same time, why not make the winter fuel allowance a taxable benefit instead of tax-free? That would go a long way to meeting the objection that it isn't targeted at those who really need it.

justsotax - I disagree entirely. Complexity in a tax system is a very good way to hide "stealth" taxation. It is possible to have a system that is both simple AND fair. I am not suggesting a flat rate tax - but an income tax much like our present one, with thresholds that are automatically index-linked and thus taken out of politics, and a system that is properly progressive and redistributive so that there really is enough money to pay for proper welfare provision. For ordinary people to have to scratch around for the funds to get a decent level of care for their parents or grandparents with dementia is a terrible indictment of our successive recent governments.

 

@thornyissues...tax mitigation is not just limited

justsotax | | Permalink

to the 'rich'....i can assure you that unfortunately none of my clients fall within the top 1%....the vast majority being small businesses.  As for a simplified system producing more tax...well i guess i need to be convinced (in a similar fashion to the suggestion that dropping top rate of tax by 5% will produce a bigger tax take....a paradox i still haven't got my head around)

I am sure there is a better way of doing things (and inevitably if we started over we could create something better) but we are where we are.....any major changes (no matter how noble/logical/beneficial) will come at a cost....and as always what works on paper never quite works the same in practice.

 

 

Are NIC receipts ring-fenced

chatman | | Permalink

Are NIC receipts ring-fenced for pensions, unemployment benefit etc, or do they just go into the same pool as everything else?

tax on pensioners

admin.trssecret... | | Permalink

I must disagree with solicondale: why should pensioners pay the same rates of income tax as everyone else? The majority of pensioners have to exist on a reduced income whilst costs continue to rise. The upcoming generation of pensioners is likely to have seen their pension funds eroded (unless state sector employees) and many will still be paying mortgages.

I  believe that the cut in age allowance was a particularly mean-spirited act by the Chancellor. Self-employed pensioners are already liable for class 4 NICs for as long as they work to top up their income. Coupled with the fact that people are living longer these moves may well add to the state funding burden in the long term as those who could have managed to support themselves for longer will end up needing some form of state support of one form or another at an earlier stage in their retirement.

 

 

 

silicondale's picture

misunderstood?

silicondale | | Permalink

trssecret - I think you misunderstand. I also said that I thought the state pension should be increased to compensate for any increased taxation. This keeps the tax system both simple AND fair. It also means that those relatively few pensioners who are seriously wealthy will pay their full whack of tax. I agree absolutely that the cut in age allowance was mean-spirited. But then I would expect nothing better from this mean-spirited and shambolic government. Integrating NIC with income tax should also include abolition of class 4 NICs of course.

And as for erosion of pension funds, I know at first hand. In the 1990s I was building up a reasonably respectable fund. After being clobbered by charges from non-performing insurance companies when transferring to a SIPP, then raided by Mr Brown, hit by falling annuity rates, and drawdown limits being chopped by new GAD rules, I am a bit punch-drunk now. Especially evil that this government seems to have a not-so-hidden agenda to keep interest rates as low as possible while leaving inflation to roll on, so all savings accounts are losing money in real terms. These are the rewards for prudence, and avoiding debt. Those who were not responsible for the mess we are in are precisely those who are paying for the clean-up, while anybody with sky-high debts is laughing all the way to the bank (unless they're in Ireland, Greece, or Spain of course). 

"There ain't no fund"    1 thanks

vstrad | | Permalink

I'm afraid you have missed something, Ken. As Aneurin Bevan famously said "The great secret about the NI fund is there ain't no fund!"

I accept the point that

Anonymousey | | Permalink

I accept the point that without additional tinkering there would be winners and losers but presumably there's always another lever that can be pulled to even the impact out. 

I suspect though that much of the advantage in integrating the two is the opportunity to create some losers. Most notably 'solving' IR35.

Entering entirely subjective rant territory ..... If it was up to me pension income, investment income, employment income would all be treated the same. Let poor people (including poor pensioners) pay less tax and rich people (including rich pensioners) pay more tax as part of the rejig. Capital gains reliefs can always provide an incentive for ambitious people to build businesses (not that they really need a tax incentive anyway).

NI

Colin Parker | | Permalink

I have been an advocate for the abolishment of NI for some years. The 'take' splits into 3 - Government ers NI,  Private Sector ers NI and ees NI.   The first would reduce government expenditure so would be neutral, 20-25% of the second would come back automatically in increased corporation tax and a smal increase in corporation tax would bring back even more and the third should be adjusted on Income Tax. I agree with previous comments about pensioners, but let's also not forget those who live off dividends and never pay any NI - my aunt for one who is now enjoying great expenses with the NHI. All the 'service company' (IR35 can go too) as well.

But over riding all this is the fact that we are in competition with Europe and the rest of the world for economic activity.  We already have 40,000 French in London - why? because the French social security taxes are even more expensive than ours - so French Firms make their base here. That's 40,000 people paying UK tax and spending in UK shops, which we won't otherwise have.

Does that explain more tax for lower rates . . .

tax /NI on pensioners

ces.hlb | | Permalink

trssecret

As far as I am aware self employed pensioners do not pay class 4 NICs, although they appear to be still liable for class 2 - only £120 p.a.

What happened to the idea of charging NIC on close company dividends, to equalise the tax /NIC on structures between companies and unincorporated buisnesses? That might get rid of IR35 issues and a lot of clients running companies who struggle with the idea of it being a separate identity from themselves.

 

silicondale's picture

Close company dividends

silicondale | | Permalink

I guess the objections to NIC on close company dividends are threefold.

(1) it's then no longer related to employment - so there's no reason not to extend it to ALL dividends received by individuals, and in that case it might as well also be integrated with income tax;

(2) it's too easy to avoid. Find half a dozen friends or neighbours and issue them each a share in your company - and it's no longer a close company.  Sure, they'll all receive a little dividend when you pay yourself, but if you have 100 or 1000 shares, the cost is a lot less than the tax would be;

(3) it's inherently unfair. It discriminates against small companies and puts them at a competitive disadvantage as compared with larger companies. It actually extends the evils of IR35 rather than abolishing them. If an external investor putting capital into a micro-company is going to be subject to this extra tax, but not if he/she puts capital into a rather bigger company, that tips the scales even more against startups than they are already.

Surely far better to integrate NIC into income tax as proposed ?

 

Vodafone proves that employers' NICs must never be abolished ...

dstickl | | Permalink

In my humble opinion, IMHO, the alleged Vodafone UK tax take notorious scandal proves that Winston Churchill's and Clement Attlee's creation of employers' National Insurance Contributions must never be abolished ... and that the only way to partially tidy up the "fiscal horror" of IR35 is for Government to remove the worrying uncertainty of the scourge of deemed payments for workers aged over SPA (State Pension Age) working through a PSC (Personal Services Company) because they have to work due to their inadequate pensions/annuities/returns from savings, due to apparent Government failure.

REASON: IMHO, I believe it unlikely that Vodafone may employ a significant number of people aged over SPA in UK.

[Q: Does anybody out there have any specific Vodafone figures, please?]

@trssecret:Surely Class 4 NICs liability ends @ YrEnd when >SPA?

dstickl | | Permalink

admin.trssecretaries.co.u wrote:

.....      Self-employed pensioners are already liable for class 4 NICs for as long as they work to top up their income.     ......

Hi admin.trssecretaries.co.u!   Sorry, but I believe that some of your words here are a part-truth, because it's my understanding that the liability [of Self-employed pensioners for class 4 NICs] only extends to the end of the financial year in which said pensioner reaches SPA (State Pension Age).

CONSEQUENCE: For equality of treatment, surely liability for IR35 deemed payment should cease at the end of the PSC's financial year in which the worker reaches SPA, shouldn't it OTS?

@ces.hlb: Surely Class 2 NICs liability ends in week when >SPA?

dstickl | | Permalink

ces.hlb wrote:

trssecret       As far as I am aware self employed pensioners do not pay class 4 NICs, although they appear to be still liable for class 2 - only £120 p.a.   ...

Hi ces.hlb!   As above: Surely Class 2 NICs liability ends in week when >SPA?

CONSEQUENCE: For equality of treatment, surely liability for IR35 deemed payment should cease at the end of the PSC's financial year in which the worker reaches SPA, shouldn't it OTS?