Silly season announced itself today with a string of stories trumpeting the big news that the Tories are thinking seriously about merging national insurance with income tax.
With most coverage swallowed up by Wimbledon and the World Cup, serious stories are harder to come by. With little else to chew on, The Independent on Sunday livened up the political pages with a report explaining that senior Tories were examining NI reform for possible inclusion in next year’s Tory general election manifesto.
The last inkling of this policy emerged just ahead of the Budget, when backbench MP Ben Gummer proposed a bill under the 10-minute rule to rename national insurance the earnings tax and connect it to income tax.
According to the Independent, George Osborne came close to endorsing the reform in this year’s Budget, but backed off because of the difficulty of integrating HMRC’s computer systems. Instead, we got a small procedural tweak with Class 2 NICs for the self-employed now being collected via self assessment.
As the idea has developed, employee’s contributions would be folded into a basic rate of 32%, with higher rate taxpayers assessed at 52%. Employers’ contributions would remain unchanged.
Merging NICs and income tax has a lot of history behind it, for example going back to the 2011 small business tax review carried out by the Office of Tax Simplification that recommended work should start on a long-term project to merge the taxes. The Institute of Fiscal Studies, and many AccountingWEB members for that matter, have lobbied for the same reform, which would help to eliminate the differentials that encourage so many consultants and service one-person service providers to opt for limited company structures paying low salaries and high dividends.
As the IFS Mirlees review argued in 2011, “National Insurance no longer serves any purpose as a separate social insurance contribution linked to benefit receipt. Maintaining it as a separate tax serves only to create confusion and complexity.”
More recently, IFS director Paul Johnson told a CIOT meeting in London, “It’s very hard to provide a good explanation for having two systems.” For governments, it has the advantage of letting them forget about NICs when it tinkers with personal tax rates, and then pretending it’s about the NHS, Johnson suggested. There would be complications about how earned income was taxed compared to investment income and creating rates that would lessen the burden on pensioners, but merging NICs into income tax was the right way to go “when it’s national insurance that creates all the difficulties in how people are taxed”, he said.
During his talk, Johnson commented that progress on tax simplification had stalled since 2010 and that that it was hard to be optimistic about the chances of reform. “In some ways the economic crisis was wasted as an opportunity to think about tax policy,” he said.
Parliament is particularly weak on tax issues - for example, there’s no select committee devoted to the £600bn raised through tax - and the executive branch holds all the power in this area. If the prime minister and chancellor lose their enthusiasm for reform - as the current officeholders seem to have done - then it’s not going to happen.
“We need to start being more transparent and political parties being more mature about it - not immediately closing down an idea the minute it is raised,” Johnson said.
David Ingall, past president of the UK200Group, commented: “Here we go again. Reform and simplification promised, but is it really? Presumably there is going to be a new 20% rate for the retired and those in receipt of a pension or those exempt from NIC (generally those over 65).
“So to remove NIC (though presumably there will still be the equivalent charge on employers), whatever it is called, there are going to have to be yet another raft of exemptions and tax reliefs. That is unless the proposal is intended to effectively raise the tax burden on the retired very significantly. Very unlikely coming into an election where the grey [haired vote] is going to be so important.”
What are your thoughts on the chances of meaningful tax reform in the next year or two? Is the political mood changing at last, or are we just chasing a stray silly season policy balloon?
About John Stokdyk
AccountingWEB’s Head of Insight has been with the site since 1999 and likes to spend his time studying accountants’ technology habits. When not nerding out, you can find him exploring obscure indie music and searching for the perfect organic sourdough loaf from his base in Brighton, UK.