Separate national insurance and income tax systems are “outdated” and need to be reformed to be “fit for the future”, the Office of Tax Simplification has urged.
In a recent burst of activity, the independent board renewed its call for the government to align income tax and national insurance contributions (NICs) more closely in a report that says aligning them more closely would create a “simpler, more transparent and fairer system”.
The OTS originally floated this proposal in 2011 but George Osborne wanted a wider review of small company taxation and consultation on “options, stages and timing of reforms to integrate the operation of income tax and NICs”.
This week the OTS followed up its March 2016 report with further findings on income tax and NICs. In the forward, the OTS outlined the reasons for aligning NICs and income tax: “We live in a changing business environment, with diverse ways of working, and there are a growing number of people who combine self-employment, multi jobs and freelancing. The current system was built for yesterday and not for today, let alone for tomorrow.”
The OTS said an overhaul of the NICs system would take individuals’ total annual employment income into account rather than considering weekly or monthly earnings from each employer separately.
Emily Coltman, FreeAgent’s head of accounting, said the report takes a step in the right direction, particularly for individuals with multiple jobs in the tax year. “The fact that one (income tax) is worked out cumulatively, while the other (NIC) is calculated job-by-job, is confusing and difficult to understand.
“I would also like to see a closer alignment of the rules around benefits and also for the self-employed. The abolishment of class 2 NI is expected imminently but this will then bring complications around setting eligibility to state pension through class 4 NI. I would hope to see the OTS involved at an early stage in this work.”
The OTS review was also welcomed by tax bodies and groups. Robin Williamson, LITRG’s technical director, said: “The NICs system cannot carry on as it is if we are to achieve a much needed simplification of the tax system. The OTS’s proposals are a major step towards simplifying NICs and the interaction with tax on employment income, and make for some welcome greater transparency.”
Colin Ben-Nathan, chairman of CIOT’s employment taxes sub-committee, added that two different systems charging tax on the same income leads to “duplication, complication and additional cost all round”.
The move to an annual, cumulative and aggregated (ACA) tax mechanism, however, would produce winners and losers. The OTS expected part-time employees and those aged under 35 and in lower paid service work to gain, but multi-jobbers paid more than £20,000 annually and those at higher income levels will likely lose out.
Ben-Nathan commented: “One approach may be for the Government to raise the primary threshold for employee NIC closer to the level of the income tax personal allowance so that the lower paid are properly protected. Such a move will have to be judged against a potential cost to the Exchequer.”
The OTS also examined whether employers’ NICs should be applied at a 10% rate to total payroll costs without any thresholds or allowances. This would equalise the NIC burden on full-time and part-time work. But it turned against this option as it might affect industries disproportionately. A number of other options for the tricky problem of employers’ NICs are being explored.
While the NICs/income tax report will attract the most attention, the OTS has released a page of other papers and initiatives in recent weeks. These include:
- A commitment to engage actively with HMRC on MTD
- The decision to park proposals for lookthrough companies as a solution to the incorporation boom for one-person companies. Instead it recommended pursuing the sole enterprise with protected assets (SEPA) model as a way to give very small businesses some protection for major assets such as the family home and pension pots.
- A consultation on the simplification of corporation tax, which closes on 31 December 2016.
What do you think about aligning the rules for NICs and income tax as the OTS has suggested? Will it create a more transparent and simpler system? Comment below with your thoughts.