National insurance reform back on the agenda

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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.”

Community reactions

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

John Stokdyk, AccountingWEB head of insight

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.

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By MattG
01st Jul 2014 09:13

"As the idea has developed,

"As the idea has developed, employee’s contributions would be folded into a basic rate of 32%, with higher rate taxpayers assessed at 52%."

Should that not be 42% for higher rate, as it is now (bar the current slight differences in NI and HR thresholds, which obviously would disappear)? I note the error is present in the independent article too, unless of course they are suggesting the tories are mulling over a 10% tax rise for higher earners.....somewhat unlikely!

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01st Jul 2014 12:14

Guilty as charged

You're right, I did "borrow" the explanation from The Independent, as they have the contacts with Tory policy-makers to know what is being considered. Like them, too, I had not appreciated the way the thresholds operated for higher rate income tax payers.

I freely admit the story is all rumour and conjecture at the moment, but it relates to a policy that has been widely debated on the site that I thought would stimulate interest (if not false hope).

I will take a bit of time to see if I can find more substantial information about the idea. If I do so, I will report back here - but would welcome any input from better informed members of AccountingWEB.

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02nd Jul 2014 09:26

It has to be

all rumour because they are working on "upgrading" IR35. Now i'm not a rocket scientist but  would presume once NIC and tax are merged then IR35 is defunct or do they intend keeping ers nic in some shape or form.

My instincts tell me "electioneering" is the name of the game.

What the Tories have to concentrate on is building bridges with UKIP cos they could hold the balance of power, especially after the recent appointment.

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02nd Jul 2014 09:43

political suicide

Silly season as you say John. Not least because most other commentators seem unaware of the previous refs to the possibility of merging NIC and IT.

Does anyone seriously expect that this or any other Government will be willing to preside over a perceived increase in the basic rate of tax to 32%?

It's not going to happen. Move along please.

Mark

 

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02nd Jul 2014 15:59

Political suicide

bookmarklee wrote:

Silly season as you say John. Not least because most other commentators seem unaware of the previous refs to the possibility of merging NIC and IT.

Does anyone seriously expect that this or any other Government will be willing to preside over a perceived increase in the basic rate of tax to 32%?

It's not going to happen. Move along please.

Mark

 

You've expressed my view more succinctly than I ever could myself, Mark.
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02nd Jul 2014 10:24

I agree with Mark

UKIP proposed something similar a while back, and then changed tack when they realised how the taxpayer would perceive it.

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02nd Jul 2014 11:42

Political problems

This will never happen.  It is a political problem, not a tax problem.  Although great for employers/tax practitioners there is little political upside for the Government.

The gullible public believe that the basic rate of tax is 20%. If overnight it became 32% the tabloids would go into a frenzy.

For example we had such a fuss with the 'Granny Tax'.  This was to my mind unfounded as pensioners as a whole would end up better off as they no longer would have abatement of age allowance.

The way I would proceed is: -

1. Combine income tax and NIC into a 32% combined levy (basic rate), but for political purposes earmark the NIC content as 12% (even though it is a fiction).

2. Pensioners would have a rate of 20%.

3. Abolish employers NIC, to relace it with a payroll levy of say 13.8% on total payroll costs to include gross wages, payments to contractors, benefits and any dividends paid.

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02nd Jul 2014 16:01

Political problems

jon_griffey wrote:

This will never happen.  It is a political problem, not a tax problem.  Although great for employers/tax practitioners there is little political upside for the Government.

The gullible public believe that the basic rate of tax is 20%. If overnight it became 32% the tabloids would go into a frenzy.

For example we had such a fuss with the 'Granny Tax'.  This was to my mind unfounded as pensioners as a whole would end up better off as they no longer would have abatement of age allowance.

The way I would proceed is: -

1. Combine income tax and NIC into a 32% combined levy (basic rate), but for political purposes earmark the NIC content as 12% (even though it is a fiction).

2. Pensioners would have a rate of 20%.

3. Abolish employers NIC, to relace it with a payroll levy of say 13.8% on total payroll costs to include gross wages, payments to contractors, benefits and any dividends paid.

Jon, I was trying to find anything in your post that I disagreed with - but failed.
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02nd Jul 2014 12:13

Do not

poo poo the general public. They are quite aware of what is going on. What is the point of a payroll levy? Replace it with SET? Taxpayers will respect one rate of tax with no other deductions as long as it's across the board. It's the government who won't accept it. Wonder why?

UKIP haven't changed track, other things have come to the fore. Don't forget to come from a minority into what could replace the Lib/Dems takes a lot of organisation and things have to be prioritised.

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By janefg
02nd Jul 2014 12:42

Self employment
What will happen to the self employed? Will they still continue to pay Class 2 and 4? If not and they also have to pay the 32%, will that mean that they will also get some sort of "no work" benefit and other benefits available to the employed?

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02nd Jul 2014 13:08

@janefg

I presume the idea of merging tax and ni is to do away with ni.

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02nd Jul 2014 13:57

Pension income?

Negative tax savings for those who have already saved in pensions.

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03rd Jul 2014 17:40

it won't happen

Because then the general public will realise that basic rate is only 10% less than the higher rate!

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05th Jul 2014 19:52

Multiple jobs

The otehr thing no one seems to have commented on is that multiple jobs (increasingly common) attract a separate starting threshold for each job for Class 1 NI  but only only a single threshold for PAYE across all employments. Losers but no winners here?

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