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OTS backs NIC/income tax alignment

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18th Nov 2016
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Separate national insurance and income tax systems are “outdated” and need to be reformed to be “fit for the future”, the Office of Tax Simplification has urged.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. 

Replies (28)

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By cfield
21st Nov 2016 10:57

They might as well scrap NI completely given that it's original purpose and principles have now been completely trashed. The link between contributions and benefits has now been utterly destroyed by generations of politicians who insisted on treating it as a tax.

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Replying to cfield:
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By rbw
21st Nov 2016 11:57

cfield wrote:

......contributions and benefits has now been utterly destroyed by generations of politicians who insisted on treating it as a tax.

On a point of detail I think many of the breaks from the contributory principle were to save money (by switching to means testing).

All rather topical this year (for the few wonks who care) because the mostly non-contributory welfare system was one of the "pull" factors for EU migrants coming to low-paid jobs. Some in the EU quietly pointed this out to the UK time and again. One can only wonder what might have been if eg tax credits and housing benefit were "insurance based".

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By Michael C Feltham
21st Nov 2016 11:59

I much agree.

Originally, what was then The Board of HM Inland Revenue, were tasked with the collection of NIC, ON BEHALF of DWP.

Let us recall when "The Stamp" started. This was to pay for an "Old Age pension". Health services were provided by local subscription and charities. Then Nye Bevan sequestrated all clinics, hospitals and mental homes and treatment facilities and demanded most GPs became servants of the state, when he formed his National Health Service. And guess what? Part of "The Stamp" would be used towards NHS costs.

Well, what exactly IS NI, now?

In truth, it is simply a tax on employment; nothing more and nothing less. If you like it is Non-Selective Employment Tax (Remember Selective employment Tax? Another political wunderkind!).

In the now long past days when I could be bothered, I took up this point with my then MP, Sir Teddy Taylor (I knew him quite well and I suppose it helped since at that time, my late Mother was Chair of one of the local Conservative associations!). Teddy agreed with me that NICs were simply tax. He and I then took this point up with Egg-wina Currie, then a Junior Minister. Stupid silly woman; waste of time our so doing.

DWP are in a real shambles and haven't much of a real clue who has paid in how much, in truth. Not helped, I am sure, since PwC took over a huge DWP re-organisation consulting project...

Class IV was and remains simply a tax; for which contributors receive not a sou in benefit. It was and remains simply a tax on the self-employed for daring to try and nick an honest living from this spavined world, employ others, them put bread on their tables and risk capital and effort.

How bloody dare they!

Whilst NICs, are supposed to be ring-fenced into a protected state fund, it is interesting to consider what happened to it!

Worth looking at the fund's history!

https://en.wikipedia.org/wiki/National_Insurance_Fund

Notice: the fund's value was, err, re-set owing to "...due to errors in assumptions by the GAD".

Can we trust anyone of these duplicitous clowns?

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By gazza5
21st Nov 2016 11:05

At the moment you could have four jobs paying £5000 each and not pay any NIC.

I read from above that if someone is earning from four jobs this will then become like tax and on a cumulative basis resulting in NIC now becoming payable as you would only earn lets say £10k with out no NIC and the rest would have NIC.

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By Joe Soap
21st Nov 2016 11:39

About bl**dy time.
jfdi.

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By philcollis
21st Nov 2016 11:52

Has anybody mentioned the situation of retired people who still do part time work? At the moment we don't pay NIC anymore but do, of course, still pay income tax on part time earnings. Would there be a further allowance to compensate pensioners from any higher combined rate of tax & NI ?

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By kevin503
21st Nov 2016 11:56

Makes sense. The political focus on the income tax rate ignored the stealth tax that NI has become. Roll them into one, same starting rate, no upper earnings cut-off. Very potitically palitable for employees.
Replacing or renaming Employers NI will be a bit more tricky.

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Replying to kevin503:
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By rbw
21st Nov 2016 12:11

kevin503 wrote:

Replacing or renaming Employers NI will be a bit more tricky.

Yes, the OTS are repeating their practice of swerving round the *politically* difficult issues which have been flagged up time and again in work on merging PAYE and NICs (rarely tax and NICs) since (at least) the mid 1990s.

But I give them credit for what I think is a new idea: NIC codes separate from PAYE codes (which avoids the need to align fully the base for PAYE and NICs). I wish though they had said a bit more about how employees will react rather than resting on "a transformation in the way that taxpayers engage with HMRC to exchange information.
Improved and increased online systems will ensure that almost all PAYE, and by implication NICs, reconciliations are automated"

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Replying to kevin503:
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By rbw
21st Nov 2016 12:11

kevin503 wrote:

Replacing or renaming Employers NI will be a bit more tricky.

Yes, the OTS are repeating their practice of swerving round the *politically* difficult issues which have been flagged up time and again in work on merging PAYE and NICs (rarely tax and NICs) since (at least) the mid 1990s.

But I give them credit for what I think is a new idea: NIC codes separate from PAYE codes (which avoids the need to align fully the base for PAYE and NICs). I wish though they had said a bit more about how employees will react rather than resting on "a transformation in the way that taxpayers engage with HMRC to exchange information.
Improved and increased online systems will ensure that almost all PAYE, and by implication NICs, reconciliations are automated"

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By Ian McTernan CTA
21st Nov 2016 12:00

Align them completely. Then work out how much this would cost, and adjust rates accordingly. Then stop calling it 'NIC' and just call it tax, and have the same rules apply to it all, ending the current mess.
Employer's NIC would then be adjusted to say 10% and be called what it is, Employer Job Surcharge Payment.
Of course, finding out that the true basic rate of tax in this country is actually nearer 31% than 20% might come as a shock to some...
Pretty sure someone could work out some way of ensuring credits for state pensions etc when rewriting the rules.
Then start on reform of the welfare system.

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By schocca
21st Nov 2016 12:08

It's never going to change for the following reasons:
1) Employees NIC will not merge with income tax as it will point out to the workers how much tax they really pay.
2) Employers NIC will not change as this will ALSO highlight how much tax employers pay...

Yes the OTS is right, but no it will not change... it's political suicide to do so...

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Replying to schocca:
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By Ian_mcdonald
09th Jan 2017 14:03

schocca wrote:

It's never going to change for the following reasons:
1) Employees NIC will not merge with income tax as it will point out to the workers how much tax they really pay.
2) Employers NIC will not change as this will ALSO highlight how much tax employers pay...

Yes the OTS is right, but no it will not change... it's political suicide to do so...

Agreed, the politicians are the roadblock.
But merger of Income tax and NI has to be done.
So a softly, softly, approach has to be worked out.
Plenty of smoke and mirrors needed.

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By GraceinGlasgow
21st Nov 2016 12:15

I hope any pensioners who are also working do pay the full whack. If they have pensions, they don't need a job and they should move aside and let a young person with no job have a chance.
This is the typical kind of argument which makes out tax law so extraordinarily complex. Yes, the pensioners take a (small) hit and no, we shouldn't make extra rules for them.

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Replying to GraceinGlasgow:
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By Michael C Feltham
21st Nov 2016 12:54

What an utterly arrogant and ignorant response!

The core reason so many over the state retirement age continue working, is purely and simply to survive!

Mainly since their savings and meagre investments have been screwed up by the Young Turks in the City (all taking obscene bonuses, natch) and idiot politicians.

Perhaps the wee clue in the term might be the single word "Insurance"?

If your motor insurance underwriter demand you continue paying, even years after you sold your car and turned in your driving license would you still be happy to pay? Even if they tried to justify their act by whining that they were skint! Or would you be delighted if after 30 years of paying the premiums on a 30 year term, Endowment Life Assurance with profits, the assurer demanded continued payment? Probably not in both cases.

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Replying to Michael C Feltham:
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By Vaughan Blake1
22nd Nov 2016 11:48

On the other hand NICs also (in theory) pay for the NHS, which is probably used more by more elderly taxpayers.

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Replying to Vaughan Blake1:
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By Michael C Feltham
22nd Nov 2016 15:52

Vaughan Blake1 wrote:

On the other hand NICs also (in theory) pay for the NHS, which is probably used more by more elderly taxpayers.

Only a very small proportion: read the webref I earlier provided.

In any case, NICs were increased, to factor funds transfer from the National Insurance Fund, to the treasury.

The NHS is in majority paid via gross Treasury's income; from taxes and duties.

That said, retirees over their life have paid huge quantities of taxes, both direct and indirect and many have been little drain on NHS budgets.

Let us also not forget the number of UK citizens, now, who enjoy employment-provided private health cover: which saves, directly, NHS funds.

Originally, this was provided as an employment benefit. Then government decided it was a notional benefit and bloody taxes it! How insane can a tax system become, when it taxes something which SAVES the government itself money?

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Replying to GraceinGlasgow:
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By schocca
21st Nov 2016 21:49

GraceinGlasgow wrote:

I hope any pensioners who are also working do pay the full whack. If they have pensions, they don't need a job and they should move aside and let a young person with no job have a chance.
This is the typical kind of argument which makes out tax law so extraordinarily complex. Yes, the pensioners take a (small) hit and no, we shouldn't make extra rules for them.

I think you will find that anybody over state pension age does NOT pay employees NI (Class 1 NI Category C). (Employers NI is still paid, but that's a different elephant).
https://www.gov.uk/national-insurance-rates-letters/contribution-rates

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By chancewind
21st Nov 2016 12:34

I have always thought NI was unfair as those living on investment income, rents etc get away with a lower rate of tax (ie income tax and NI) than those employed.

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By Nick Graves
21st Nov 2016 13:29

...and that was also a large part of the IR35-nonsense 'problem'.

Which is one reason I have zero sympathy with it - the whole NI problem was created by the polyingticiunts as a lie, and like Basil Fawlty, they wind themselves in bigger knots as it progresses...

Thing is, if there is any hope in getting MTD not to collapse, they need to move to a high personal allowance/flat-rate tax/reduced benefits model and stop distorting the economy and impoverishing the lower-middle classes.

But doing the reform in the right order will never happen and they'll make another front-wheel drive horse & cart again.

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By Marlowe52
21st Nov 2016 14:04

PhilCollis already raised the issue of pensioners having part-time jobs - but it isn't just that. More and more of us of 'pensionable' age will have to keep on working full-time well past 'normal' retirement age because of the abysmally poor performance of our private pension funds.
If I'd paid National Insurance for nearly 50 years I would be pretty upset if there was no corresponding allowance in the new income tax to reflect that fact. Oh, hang on, I have paid NI for nearly 50 years!

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Replying to Marlowe52:
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By Michael C Feltham
22nd Nov 2016 08:46

Quote:
If I'd paid National Insurance for nearly 50 years I would be pretty upset if there was no corresponding allowance in the new income tax to reflect that fact. Oh, hang on, I have paid NI for nearly 50 years!

One small point, Marlowe: in 1911 when National Insurance was introduced, unless you started paying your stamp ten years before you were born, then you would be dead! Since Life Expectancy for males was just 50 years of age on average and 53 for females.

And this was and remains the clever wheeze about it! When a payer pops their clogs, there was no residual benefit, unless they were married (this was introduced later and now seems to have evaporated).

As Government continues to escalate state retirement age, then many will simply never ever see a sou.

Alright for duplicitous MPs, who ensure their retirement is well larded with other devious income streams on the side and in any case, retire with a rather nice pension...

http://www.telegraph.co.uk/finance/personalfinance/pensions/11685857/MPs...

And as we know, those enjoying a much higher income and lifestyle standard (who will not/do not) have to rely on the State Pension for essential retirement income, present with much greater longevity.

One might be forgiven for believing, the system is cynically intended to create Fiscal Euthanasia (©PDD (R) Ltd): great scam! Kill 'em off before they can draw much pension and then they have become no drain on the NHS and age-related attendant costs!

Win-Win!

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By Marlowe52
21st Nov 2016 14:14

And, by the way, GraceinGlasgow, I'm also an employer. I don't think I'll step aside just yet.
Hmm, might consider taking on some more pensioners though if some of the younger staff would step aside. As you say, they can afford to work for less. I doubt they really need the money. They would probably just squander it on Werthers originals.

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Dave Chaplin
By Dave Chaplin
21st Nov 2016 15:54

Employers NI is indeed "the tricky bit". It's the £60 billion elephant in the room.

Suppose we ditch employers NI and ditch employees NI, and just have tax.

Example:
A firm pays Bob £44,920 in salary each year. PA of £11K. The total cost to the employer, due to extra employers NI is £50K.

Total tax collected is £16,478.
Bob takes home £33,521. (67% of £50K / 74% of salary)

OK - now we ditch NI, both lots. We then need to raise each income tax band by 19% to get the same figures.

The company now pays a salary of £50K
Bob still gets £33,521 (67% of £50K)
But the income tax bands are now:
Basic rate - 39%
higher rate - 59%
Additional rate - 64%

Answers on a postcard as to why no MPs will sign up to this?

Dave Chaplin
ContractorCalculator.co.uk

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Replying to davechaplin:
By cfield
21st Nov 2016 17:59

davechaplin wrote:

A firm pays Bob £44,920 in salary each year. PA of £11K. The total cost to the employer, due to extra employers NI is £50K.

Total tax collected is £16,478.
Bob takes home £33,521. (67% of £50K / 74% of salary)

OK - now we ditch NI, both lots. We then need to raise each income tax band by 19% to get the same figures.

The company now pays a salary of £50K
Bob still gets £33,521 (67% of £50K)
But the income tax bands are now:
Basic rate - 39%
higher rate - 59%
Additional rate - 64%

But how do you persuade employers to pass the NI saving on in higher wages? Many would be tempted to keep it for themselves.

And what about smaller employers who benefit from the £3k employers allowance? Why should they increase wages when they are saving nothing? Their employees will then end up paying higher tax with no extra income t0 pay it from. 2 employees earning the same wages from similar jobs could be in entirely different situations according to who they work for.

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Replying to cfield:
Dave Chaplin
By Dave Chaplin
21st Nov 2016 21:56

My example is really just to highlight how much tax people are paying. Can't see employers NI being ditched overnight. In practical terms, the only way I could see it being done is to perhaps decrease Employers NI each year by 1% whilst increasing income tax to make up the overall loss. Might take 14 years to do it that way!

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By ruth.julian
22nd Nov 2016 19:53

The problem is much wider than just aligning tax and NIC. There needs to be a wider consideration of income and benefits and what taxpayers and employers are actually paying for. Most EU member states require a minimum contribution to the National Insurance/social securit1y system before an individual can draw any benefits. I also find it hard to reconcile the minimum or "living" wage with actual hours worked which are below the level needed to pay NICs, often achieved through zero hours contracts, and through use of salary sacrifice schemes. The result is that the taxpayer is subsidising the employer through paying benefits to their employees. As mentioned in earlier posts, the Treasury/HMG need to align what is needed to run the state, including NHS, benefits and state pension, with how those costs are funded by individuals (employed and living on "unearned" income) and companies/employers.

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By AndrewV12
23rd Nov 2016 11:13

Taxes never really go away, even if their purpose is reached, I understand Income tax was established to fight Napoleon, lots of changes in the above article, to many for me, cannot we just leave everything the same, okay what we pay never goes to what it was earmarked for, but they are going to shake money out of us one way or the other.
Extract above .... mmmm well its a simple approach
'The OTS also examined whether employers’ NICs should be applied at a 10% rate to total payroll costs without any thresholds or allowances'.

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Replying to AndrewV12:
Dave Chaplin
By Dave Chaplin
23rd Nov 2016 11:55

The economy is like a plumbing system, and HMRC put taps all around the system to extract as much tax as they can. Doesn't really matter where they put them, or how much they open them, as historically they only ever drain circa 36% of GDP.

They can install more taps and for a while they might get more money, but the pressure of the system falls as the economy slows and we end up on 36% again.

Or, you can close taps off completely, increasing the pressure, so the economy grows, and the amount you drain off, still 36% increases in real terms.

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