The office for tax simplification (OTS) has urged government to bring National Insurance Contributions and income tax into closer harmony.
In a detailed 200-page report, the OTS said bringing the two payroll taxes closer together would create a simpler and more modern system.
The OTS’s report outlined its seven-stage vision to closer alignment:
- Moving to an annual, cumulative and aggregate basis for NICs
- Basing employers NICs on whole payroll costs and renaming the charge
- Aligning the self-employed NICs more closely with the employees’ NICs – and benefits
- Improving transparency for NICs and the contributory principle
- Aligning the definition of both earnings and expenses for income tax and NICs
- Bringing taxable benefits in kind into Class 1 NICs
- Having a joined up approach for income tax and NICs laws and practice
The closer alignment of NICs and income tax would help cater for a British economy moving rapidly toward “scenarios often referred to as 'uberisation', the 'sharing economy' or the 'gig economy',” said Angela Knight, OTS chair, in a statement.
According to Knight, it would also demystify the system: “People don't know what the National Insurance Contributions they pay gives them in benefits, with the system giving different outcomes for the employee, the self-employed and those with more than one job. And employers - who are the collectors of income tax and national insurance - find the current system for NICs complex.”
The OTS acknowledged the proposed changes would lead to millions paying more in NICs. But, said OTS’s tax director John Whiting, “millions would also pay less”.
“Some paying more would gain contributory benefits but all these impacts need to be carefully worked through and thought about. More work is needed and so is a proper, informed debate about the considerable implications,” Whiting said.
“Inevitably, some will gain and others will lose from any change,” said Knight. “By highlighting both the need for reform and by shining a light on those difficult areas now, the OTS intends this review to trigger a full and informed debate about the impacts, how the changes could be made, how the challenges can be addressed and the timetables required, to make change as seamless as possible and to provide a system that is fit for the future.”
The OTS report notes that the recommendations are “very much in line with HMRC’s digital agenda”. “Some will make the digital systems easier to introduce and operate (eg common definitions); some are facilitated by the digital methods (eg annual, cumulative and aggregated NICs),” read the report.
“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,” said the OTS in its report. “Together these changes will remove distortions and make the system more equitable - a key desire across all our stakeholders - more understandable and hence simpler.”
The OTS is currently soliciting responses on its proposals. Any practitioners looking to add their opinion can reach the OTS on this email.