Income tax/NI merger: debate starts here

At the moment it is the operation of tax and NIC which is going to be looked at. This probably means doing away with the separate jobs and earnings periods basis for NIC, bringing the way it is calculated in line with tax. This would raise money in revenue as people with three jobs paid £100 a week in each would pay NIC under those rules whereas they don't now. However, it would therefore mean that we would need "tax codes" for NIC purposes to make it work across multiple employments. It would do away with the need for deferment applications except for those with self employed earnings.

We should also look at getting rid of the silly distinction between items liable to class 1A and class 1 - this is a real bugbear. Witness new childcare scheme from April 2011 where if excess childcare is provided to HR taxpayers the excess goes on P11D for tax but through payroll for NIC if childcare vouchers and P11D (brown box) for directly contracted childcare. Absolutely ridiculous!

However, I remain firmly of the opinion that a full merger would show sufficient benefits to be worth exploring. It would do away once and for all with the play off for small businesses to incorporate, and would also enable the abolition of IR35. The amount of complexity removed both from the taxpayer's and HMRC's side would be staggering and I believe that it would be short sighted not to explore this further. I shall be working as hard as I can to put this view across and look forward to engaging with all concered to this end.

Ok, merging PAYE and NI will be difficult, but it is clearly the way forward.

But payroll software suppliers are just about to be handed a different giant task, of integrating RTI (real time information) with HMRC. Presumably before that has even bedded in the parts of it to do with NI will be ripped out again and further giant changes to calculation routines will be required (you can bet your life that whatever HMRC eventually comes up with it will not be trivial to implement)

Given that two such large changes are in the offing, would it not make sense to delay RTI (which is being rushed through at the moment on a very ambitious timetable, to say the least) until the PAYE/NI merger proposal is ready to be implemented at the same time, and kill two birds with one stone.

One of the reasons that RTI is being rushed is that it has now become more about the new benefit system - Universal credit. Without RTI the current proposals for massive benefit reform cannot happen.

In reality, the full merger of tax and NIC is goiong to take longer to achieve both in convincing politicians that it is the right move and in the execution of it - I would think 4 to 5 years is probably the time frame if all went well and there were no unforseen snags. Don't forget we need legislation to break the link between earnings and benefits (including the state pension - very tricky); we need to find a home for the employer element and legislate for it (i.e. to replace the lost revenue) and we need to establish how the new tax might work for pensioners, savings income and those who are non resident but have income arising here. Huge tasks, but not insurmountable if tackled with determination. The rewards will be worth it - and GO would go down in history as the Chancellor who took the choice for honesty and transparency, and was really serious about simplifying the tax system.

Currently HMRC have between 10 and 20 million "Open Cases" in the PAYE System, depending on which HMRC source you approach. These are indiviuals who have not had their liability to Income Tax reviewed, for a variety of reasons.

The review of liability requires details of an Individuals Tax free Allowances and Taxable deductions, to give a "net tax free" figure and the toatal Taxbale Income figure. The latter is normally provided by Employers on Forms P14.

Where HMRC are unable to determine the toal Taxable income, there would appear to be a situation where either the Employer did not notify HMRC ( very unlikely ) or the Employer did notify HMRC but HMRC did not match the information ( Very likely ).

It is interesting that in the HMRC 2009/2010 Accounts there is an admission that HMRC have recieved some 1.7 million notifications of NI Contributions whic they have been unable to match to any Individual's computer record.

If merger between Income Tax and NI takes place, will HMRC produce details of all the Individuals where they apparently haven't matched PAYE information from Employers to their own Computer records?

Bye the way, interesting to note that HMRC continue to stick to their view that any failure by them to match information receved with their computer records is obviously the fault of the Employer and nothing to do wth their failure to match.

structural change of the tax system is hardly going to be high priority in the current economic climate.  there is enough uncertainty around without creating any more.  And left to their own devices the politicans will simplify it in such a way that what remains is more complicated than what thye started with.

I guess you could come up with any number of complicated schemes designed to ease the pain, but surely the starting point should be straight abolition of NICS and an increase in the basic rate, and resist the complications designed to mitigate the resulting impacts.  OR is this too simplistic?

Was it wrong to rule out the extension of NIC to other forms of incomes and age groups; that would certainly simpify processes, and the understandable howls of anguish could be molified with a phased age application. Interestingly, recognising that pensions are really deffered pay, thi swould mean that the NI "lost" on teh contributions is picked up on withdrawal.

The French version of NI does uniformly apply - not that I am advocating all things French.

If they really meant getting rid of all NI then surely our gross wage figures would all need to be boosted by the amount of employer's NI, only to have it taken back again by the higher tax rate from the combined PAYE and NIs .

Call me Gypsy Rose Lee, but this will not happen.

I strongly suspect that steps will be taken to integrate Income Tax and Employees NI, however I doubt that anything will be done with the more insidious Employers NI.

From every employers perspective, Employers NI is a cost of employing each and every one of those working for the company. This means that the stolen 13.8% of salary, which is not shown on the employees payslip is taken by stealth by the government. If there was no Employers NI, then the vast majority of employees would receive higher wages. This is a fundamental of economic incidence. Corporate taxes are paid for by shareholders receiving lower dividends and more importantly employees receiving lower wages.

We need to shine a light in the dark corners of the UK tax code and eradicate the primary barriers to economic growth and employment. Both forms of NI are effectively stealth taxes on employment. The cost would need to be neutralized by adjustments to income tax rates, allowances and thresholds, but it would be good to do it. Then the average taxpayer would begin to see how much they are REALLY paying in taxes.

Is it me, or do I hear the sound of a quiet and distant revolution in the air? Slow and gradual, but growing louder as it approaches. I'm feeling a slight sense of optimism for a change.

Maybe I should change my nom-de-guerre (for it is that rather than a pseudonym) to "WaitingForTheEndofHMRC"?

Maybe not....

I got myself throughly over excited about all of this, before I got a firm reality check on Friday. We have been here before more than once before. I have not got hold of the conclusions of the last working party on this dated September 1993, and there was a lot of work done on it in the 80's too.

I'm going to analyse the conclusions of the report and see whether they offer any scope to move forward now - in other words, whether the reason this was not a good idea (in spite of the benefits offered) 18 years ago is still a reason now. Then we might be able to see whether progress can be made. I'll get it underway this week.

I said some time ago that the many are getting fed up with being manipulated by the few in the financial world.

What we are seeing in the middle east will spill over (obviously not in the same manner) into Euroland. Government have seen this coming and are trying to take steps to avoid what will be a massive change in the way the financial institutions operate including HMRC. We know that communism and capitalism don't work so lets have a bit of realism for a change.

I suspect the main problem with merging NIC is that starting with Maggie all flavour parties have decreased income tax at the same time as increasing NIC.

I was quite impressed when Cameron outed employers NIC by calling it a jobs tax. As the party has only recently come to power they're in a position where they can reform by blaming it all on the previous Government. Before that is, they are tempted to use the NIC stealth tax route themselves. Er... hang on.... too late?

Perhaps employers need to take the initiative, can we make a note on payslips of the amount of employers NIC paid?

However if we increased tax by enough to fund removing NI, then anyone that lives on investment income including old people will complain. Therefore it is likely that we will have a different tax rate for each type of income.

So back to the same old issue of “play off for small businesses to incorporate”

Tom,

As RTI is just about sending a few numbers to HMRC each month and these numbers are already needed in payroll software to work out tax/NI, the data for RTI is no big deal.

The only hard bit of RTI is the process of sending the data and controlling when it is sent (e.g after pay run has been checked!)

As the process of sending the data will not be changed by combining tax/NI, I don’t see how the two issues are linked.
 

It's not that long ago that bank interest was taxed at a basic rate of 20% whilst the normal basic rate of income tax was 22%.  So revert to that idea with a savings rate of 20% that applies to interest, dividends, pensions and capital gains and have a standard basic rate of 30% (hopefully, rather than the new 32% for income tax and employee's NI) for all other income.  This avoids introducing national insurance onto income that doesn't currently suffer it.  Higher rate tax would then be at a flat rate (say 42%) on everything.

To prevent another IR35 arising, simply rule that dividends are only eligible for the savings rate if less than 20% of the company is controlled by the recipient.  A less harsh restriction would be to limit the dividend to the amount taken in salary, which is subject to 30% basic rate and employer's NIC (too big a contributor to be abolished).

With the current moves towards having corporation tax at 20%, there will be a neat match with the new dividend tax credit.  Whether that becomes repayable as it was pre-Brown is another matter.