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The basis of a good tax system

14th Nov 2010
Partner Rebecca Benneyworth Training Consultants
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Rebecca Benneyworth takes the long view on tax simplification. But where to start? She is delighted to discover that AccountingWEB members are right on the money!

Improvements to the tax system seem to be in vogue at present. We have the Office of Tax Simplification for a start. The Office was formed by the coalition government, for the life of the government “...to provide the government with independent advice on simplifying the UK tax system”. The Office has very recently published a list of 1,042 tax reliefs as a preliminary to making suggestions for simplification and rationalisation.

At the same time, we also have the new approach to tax policy making – another initiative introduced by the current government, albeit a much more “high level” strategy. The new approach is intended to support the Government’s ambition for a more predictable, stable and simple tax system:

  • to increase predictability, the government will provide taxpayers with clarity on its approach and certainty on the future direction of the tax system;
  • to increase stability, the government will slow down the rate of change to the tax code, focusing on fewer and better developed proposals supported by improved processes for changing tax law; and
  • to increase simplicity, the government has confirmed its intention to create an independent Office of Tax Simplification.

This approach leads neatly into the longer periods for consultation on draft legislation – we shall see most of the content of Finance Bill 2011 over the next two months, in line with the new policy of confirming the majority of tax changes three months before they come into effect or publication of the Finance Bill in which they will be included. No longer will Finance Bills be passed through “on the nod” without adequate time for detailed scrutiny, as this work will have been carried out in advance.

And then we have the Mirrlees review, which reported last week. In producing a monumental report on the design of a good tax system, a team of academics including economists, and at least one leading tax barrister have specified how a good tax system should be designed, and then compared the elements of good design to the current UK tax system. Of course it is up to the Government whether it follows the advice of Sir James Mirlees team, but let us assume that it will.

Let’s look at what the Mirrlees team said about the essence of a good tax (and benefits) system:

  • Taxes on earnings should be based around a progressive income tax with a transparent and coherent rate structure, with all income subject to the same rates
  • A single integrated benefit for those with low income and/or high needs
  • No transactional taxes
  • Indirect taxes should be largely uniform – VAT on almost everything – with a small number of targeted exceptions on economic efficiency grounds
  • Environmental taxes should target road congestion (not fuel use) and there should be a consistent price on carbon emissions
  • For savings taxes, there should be no tax on normal savings returns, and low tax on dividends to bring the equivalent rate on dividends to the same as other income after recognising corporation tax paid
  • A lifetime wealth transfer tax should replace IHT
  • A single rate of corporation tax with no tax on the normal return on investment
  • Equal treatment of income derived from employment, self employment and running a small company

Most members will be able to spot where the UK system does not meet the elements of a good tax system; for those who would like to read further – have a look at the Table on page 7. In fact the only aspect in which our current tax system meets the ideal is in “Additional taxes on alcohol and tobacco”. While some of the suggestions that the report puts forward might be regarded as controversial (a return to CTT – as they say everything comes back eventually – even flares!), one paragraph really struck me as spot on (page 9):

“We need to move away from pointless complexities such as that which sees the marginal rate rise from 40% to 60% at £100,000 of income before falling back to 40% at £112,950. More importantly, we need to move away from having separate systems of income tax and NICs, with different sets of rules and exemptions, pointlessly increasing administration and compliance costs and making the system less transparent.”

Well, even if the rest of the report is a little “academic”, that quote was enough for me to invest some serious time in looking at what the team propose.

So how does this all pull together?

I started to write an article on “My top 5 reliefs for abolition”. After all, with 1,042 to choose from I should have been able to find at least 5. But the more I studied the list of reliefs, the more the comments of Wild Billy came to mind. Let’s not play the numbers game, and simply boast that we have abolished 243 reliefs and thus simplified the tax system. If you really study the list (Excel download) the only ones I felt confident about abolishing were the ones I don’t really understand or have experience of – like number 7 “Aggregates levy – china clay or ball clay extraction and separation by-products”. Looks like a good candidate to me – but I haven’t the faintest idea what it does when it’s at home!

At the same time I had been reading part of Mirrlees, and it struck me that possibly the only way forward is to move ahead on all fronts. Simplification is a much more challenging task than abolishing a couple (or couple of hundred) of reliefs – it would need an understanding of the design of a good tax system. Heaven knows whether government is prepared to commit to wholesale reform of this nature but we are not short on suggestions.

And as far as abolishing NIC is concerned – it might have taken a panel of academics a few years to suggest, but you heard it here on AccountingWEB first!
 

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By Simon Newark
15th Nov 2010 12:26

Simplifying the tax system

Seems to me that the problem is that we are all, and expecially the politicians, confusing two quite different issues - (i) starting with a blank sheet of paper what tax system do we want and (ii) how do we get there from the current system.  We have made a good start by setting out what a good tax system should look like, but we need a courageous politician to actually draw up the draft provisions and set a big bang date when it will all change.  Problems with VAT in that it is driven by European law so our options are limited, but for all the rest we can't get there piecemeal; too many winners and losers to confuse matters and too many vested interests will block the changes or create tabloid headlines with one bleeding heart after another.  Just do it.  Long-term it has to be the only way to achieve the ultimate aim.

Simon Newark

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By nikicaister
15th Nov 2010 12:49

HMRC - basis of a good tax system

 We have a very strange ringroad here in Derby that has taken nearly 40 years to be connected. We are now very close to actually having a ring but chaos abounds.  Someone stopped me and asked for directions the other day and although I knew where he wanted to go, my best response was, "Well, I wouldn't start from here." Surley, this is where we are in our tax system? I am sure that the Mirrlees Report is a fascinating read but all it does is promote an academic argument - one that rightly should take place in ecomonics and commerce tutorials in our universities. But such a debate cannot generate a useful starting point for reforming our existing tax system.  As I said to the lost visitor to Derby, "I wouldn't start from here".

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By peterdell
15th Nov 2010 13:03

Embarassingly obvious

 

Let’s look at what the Mirrlees team said about the essence of a good tax (and benefits) system:·         Taxes on earnings should be based around a progressive income tax with a transparent and coherent rate structure, with all income subject to the same rates.  (Anyone working and earning income, will bankroll the economy and the heaviest burden will fall on those earning between £20 to £50k) ·         A single integrated benefit for those with low income and/or high needs. (A move towards a slightly higher personal allowance to keep the Lib Dems onboard)·         No transactional taxes (This would offend the people in the city and we definitely need to protect their income)·         Indirect taxes should be largely uniform – VAT on almost everything – with a small number of targeted exceptions on economic efficiency grounds (Increase VAT to the highest rate possible as this tax hits the poor hardest)·         Environmental taxes should target road congestion (not fuel use) and there should be a consistent price on carbon emissions. (Another excuse to tax the poorest in society)·         For savings taxes, there should be no tax on normal savings returns, and low tax on dividends to bring the equivalent rate on dividends to the same as other income after recognising corporation tax paid (As dividends and interest most benefits the richest 5% this again should be exempt from tax. Why pay tax all!)·         A lifetime wealth transfer tax should replace IHT (If IHT was already the biggest tax scam going we will make it even easier avoid paying tax on your wealth. Must keep the farmers and the bankers happy)·         A single rate of corporation tax with no tax on the normal return on investment. (Drop CT to the lowest rate possible as company’s ditch ethics and social responsibility in order to maximize profits for the wealthy).·         Equal treatment of income derived from employment, self employment and running a small company. (Class 4 NIC on close company dividends) And they actually pay people to draft this trash.

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Rebecca Benneyworth profile image
By Rebecca Benneyworth
15th Nov 2010 14:19

I'm sorry if I have over simplified

I spent many hours last week and over the weekend trying to boil down this monumental piece of work (funded by the Institute for Fiscal Studies) into manageable size - and maybe I have gone too far.

The more I read some of the work the more I conclude that there is enormous sense in what has been done, and no I don't think that this is only there to benefit the wealthy - some of the messages are most unpalatable for them too.

This Government is clearly prepared to tackle the big issues - a single universal benefit is a key aspect of the report, and lo and behold it is on the horizon.

I do think it would be a very brave step to really go for this, but some ideas about transition and where to go from here are included in the summary pamphlet (which is actually chapter 20). Yes, there are issues with VAT - but a report of this quality knows the EU constraints and has suggestions on how to move forward which don't require a bust up with Europe.

I really don't regard this as some sort of esoteric exercise. Much of this is very practical and set around the aims of a more effective and efficient tax system. I quote from page 25 of the summary pamphlet

"There are taxes that are fairer, less damaging, and simpler than those we have now. To implement them will take a government willing to be honest with the electorate, willing to understand and explain the arguments, willing to listen to and to consult experts and public alike, and willing to put long-term strategy ahead of short-term tactics."

The more I read, the more I like - and I certainly don't go in for "academic exercises".

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By tomriv801
15th Nov 2010 20:23

the question - how to simplify the tax system

simple - scrap them.

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By The Black Knight
16th Nov 2010 10:27

Agree with some of the proposals but

Equal taxes is this really a fair system, unfortunately you cannot be fair to everyone without complexity which is the reason our tax system has developed as it has.

So far as paying the same amount of as for employment, self employment and small companies ? Well do we all just give up and get jobs or will the state fund our sick and holiday,s and all the other fringe benefits. Why would I want to invest in my own business I wonder. Looks like another path to destruction to me, but perhaps we are already on that path and will not get off until someone realises that ; High taxes and high spending are only the way to destroy the UK economy.

The UK needs to reduce the state sector (slash) and reduce taxes (not make it easier for junior school level maths)

That way we will have a vibrant economy and everyone will prosper, Unfortunately the state has strangled enterprise and the UK is on its last legs.

p.s. will there be an increase in benefits for those poorer members of society who need to pay more for shoes, clothes, healthcare, etc etc for their ever increasing benefit earning units.

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By TC1
16th Nov 2010 10:47

CTT

Rebecca: What is CTT, please?

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By Wiganer Elaine
16th Nov 2010 10:53

Simplification

 If you genuinely want what is best for the country as a whole then you can't separate tax reform from welfare reform and other government spending. This merely tinkers with the system.

What are the priorities for government spending? What do the British people actually want?

How much will this cost? Is this cost viable or not and if the cost is too high what "priorities" will have to change?

How is the money to pay for this raised? ie, what rate of taxation will actually pay for these "priorities". 

Basically, if people keep wanting (and getting) what they can't afford eventually they become bankrupt.

Unfortunately, these days, it seems that most people want what they want and to hell with everyone else so long as they are allright. It's all about individual rights and no regard for collective responsibilities.

 

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By matchmade
16th Nov 2010 11:21

What the British people want

The British public, according to the chattering classes, wants "fairness" and "progressive taxation", which seems basically to mean protect and increase benefits, pay low-paid people more, and squeeze the middle classes so their net income falls much closer to that of low-paid people. They want a very-gently sloping income distribution irrespective of effort put in, entrepreneurial risks taken, talented actions taken and so on. They don't have the first idea how capitalist economies work or what motivates most people to make a living and start businesses. The rhetoric and psychology of "fairness" (a.k.a someone else pays) greatly inhibits this country and means we will never get rid of albatrosses like the grossly inefficient NHS or move to a sensible insurance-backed system for health and income protection.

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By Exector
16th Nov 2010 13:02
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By cymraeg_draig
16th Nov 2010 14:51

A good tax system ?

There are certain basics which, until met, mean that no system of taxation is fair -

 

No one whose income is below the official poverty line (currently about £9k a year) should have to pay any tax at all.It follows that all benefits & pensions should ensure a minimum income of £9k.Indirect taxes are demonstrably unfair as it is clearly unjust that a millionairre pays exactly the same tax on a gallon of petrol as a pensioner does. Therefore all indirect taxes (VAT etc) should be scrapped.Taxes should be paid according to the citizens means, therefore a fixed percentage of all income above the poverty line should be paid in taxes.

The tax system will never work while it is administered by self serving carreer civil serpants whose only interest is building up their own little empires to make themselves appear more important than they actually are (for examples of this obnoxious breed of leeches see Hartnett & Strathie). 

 

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By johnjenkins
16th Nov 2010 14:54

Hand on heart, Rebecca

Do you think that the government will make any real changes to simplify the tax system?

Altering welfare is easy peasy because the government is in charge of how they pay the money they have got, out.

Running the risk of losing income to simplify tax doesn't sound a good bet to me.

So we are not looking at tax simplification, we are looking at tax equalization or perhaps simplequalation.

An example of this would be to get rid of all NIC and increase Income tax and Corporation tax etc. accordingly.

I'm sure there are many other examples.

The point I am making is, that if things are broken down into little bits, as above, it then becomes easier to see the big picture.

 

 

 

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By Simon Sweetman
16th Nov 2010 15:56

tax and NIC

Merge them, we cry. Being tax people and thinking of NIC as a tax, we would. Indeed it has been treated as a tax, but it is also at the moment the basis of the Social Security system and surely crucial in terms of Europe and international  working. It would also potentially mean the renegotiation of parts of all our double tax and social security treaties. 

Does this mean that merger would be much more difficult ?  Does anybody know ?

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By johnjenkins
16th Nov 2010 16:23

EU

Who cares what the EU think. Time we took a leaf out of the French book and only did what we thought was right for the UK.

As for our welfare system - enough said.

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By mwngiol
16th Nov 2010 16:48

Simples

Merge tax and NI. Bumper personal allowance of at least £10k, with pensions at the same level. Flat rate tax on all income (including dividends) above that level of say 50%. Scrap VAT. Introduce a General Anti Avoidance Rule (this in itself would hugely simplify things and virtually eliminate exploitation of loopholes).

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By The Black Knight
16th Nov 2010 17:00

and

Should pensioners pay a different rate of tax to make up for the loss of their NIC exemption, what about NIC on pensions or is that a different rate of tax to compensate as well.

Unless we abolish retirement that would be simple, work until you drop.

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By Simon Sweetman
17th Nov 2010 09:03

europe

It's not about whether we care about Europe, it's about the substantial number of UK citizens working in Europe. Having some rules about social security seems a good idea. 

Rebecca - do you have any idea about whether the merger proposal is ruled out by social security rules ? 

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By johnjenkins
17th Nov 2010 09:33

Pensions

If the government are creating one welfare payment surely pensions can come under that blanket. SERPS can be added to tha payment. Once government have decided what people can live on, the rest falls into place. 

The problem government has is that it is starting from what we have now instead of looking at tax from a new beginning.

If the government need umteen billion then the quickest way of getting that money is to make things simple for everybody.

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By Wiganer Elaine
17th Nov 2010 11:16

Pensioners

 A flat rate tax for everyone is exactly what it says on the tin!

It doesn't matter who they are, be it a pensioner, foreign national working in the UK, employed, self-employed or living off investments. All taxable income/profits should be taxed at the set rate.

The personal allowance should be set at the amount of the maximum welfare benefit payable thus ensuring all people who work are actually better off than those on benefits.

The idea of welfare should return to its original premise eg provide a roof over your head if you are made redundant, medicine/hospitals etc when ill, ensure you don't starve/freeze to death. Anything you may receive above the personal allowance (ie because of rent payments) should be classed as an interest free loan and repaid once back in work.

Abolish National Insurance and increase the minimum wage by the Employers NI percentage. This is a NIL gain/loss situation for the employer but again would make work more profitable to an individual and, because he earns more money he pays more tax!

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By Vaughan Blake
17th Nov 2010 12:14

Back to Basics - what is tax for?

A huge amount of complexity arises from the government's attempts at using the tax system to encourage certain behavioral patterns and to discourage others.  This creates an additional dimension that the tax system is supposed to resolve.

For example why do we have 10% "entreprenuer's" relief for CGT when we also have income tax rates at 50%+?  Surely these two aspects are pulling in different directions.  Why should there be such a large differential between the two?  It can hardly be argued that the 10% rate favours long term business building.

Don't even get me started on the "green" aspects.  (When I was a lad if someone was referred to as green it meant that they were naive!).  I love the piece of legislation that covers approved energy efficient assets that subsequently lose their approval.  Was this necessary, does it ever work?

If HMG feels strongly that energy saving is a matter of saving the planet (the ultimate matter of life or death) then for heavens sake make the use of efficient items compulsory and not just a tax break.

I vote that we take a step back and look at the tax system simply as a way of raising money in a fair way and not as a way to control the behavior of taxpayers and save the planet at the same time.

 

 

 

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By mikewhit
17th Nov 2010 12:39

Flat rates

"The personal allowance should be set at the amount of the maximum welfare benefit payable" - ooh, so your tax allowance goes up if you have children - which parent gets that ?

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Rebecca Benneyworth profile image
By Rebecca Benneyworth
17th Nov 2010 13:10

CTT

Naughty me. Made the fatal assumption that all members are as old as I am - and of course that's not the case. Thanks to the post above, but a bit more for the uninitiated.

Capital Transfer Tax charged tax for each lifetime transfer over the nil rate band - in changing it to IHT the 7 year rule was introduced, and the concept of PET's (potentially exempt transfers - transfers which are exempt if the transferor survives for 7 years). Hope this is clear!

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By Vaughan Blake
17th Nov 2010 17:46

How Difficult Can Simple Be?

Having given the matter a good half hours thought here are my 10 suggestions for simplifying things:

1)  Scrap all benefits and related forms and deal with them all via the self-assessment tax return system.  Taxpayers/claimants only need to declare their income once on one form each year. 

2)  Scrap National Insurance.

3)  Introduce a 25% flat rate of income tax.  Deduct this from all salaries and pensions.  Personal allowances, benefits and tax credits would then be given as a tax refund/reduction in liabilty for the self-employed.  The refund would not be limited to the tax deducted if the benefits level dictated a higher figure.  Refunds would be given after submission of the form monthly in arrears by s/o.  

4)  Self employed taxpayers would do the same but without the PAYE "witholding tax". The self-employed would pay the previous year's tax monthly in arrears .   

5)  Tax BIKs at the flat rate as they are paid on behalf of the employee. 

6)  For employers, levy a flat % "payroll tax" on salaries and benefits to replace ers NIC & class 1a.

7) Set corporation tax at a flat rate being the same as in 3) above.  Taxable profit to be calculated in accordance with acceptable accounting rules.

8)  Review CGT and see which bit yields the most tax (personal/corporate, property/other assets) and scrap the the parts that yield the least.  Take a similar look at IHT.

9)  Scrap tax on investment income from FSA registered institutions.

10)  Scrap VAT zero rate and exempt.  Put say 2% on all of these

The percentages will depend on whether the bottom line is that we raise "enough" tax.

If we try to get there from here in small steps it will take forever and we will be lost until eternity in a maze of transitional rules.  A quantum leap is the only way to acheive these goals in our lifetime.

 

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By cymraeg_draig
17th Nov 2010 19:19

Old members ??????

Naughty me. Made the fatal assumption that all members are as old as I am - and of course that's not the case. Thanks to the post above, but a bit more for the uninitiated.

 

Posted by RebeccaBenneyworth on Wed, 17/11/2010 - 13:10

 

That made me laugh Rebecca - some of us can remember when National Insurance stamps were exactly that - stamps - bought at the post office and physically stuck to a card for every employee. If I recall correctly they cost 13s 4p each.

I also remember the good old days of purchase tax - applicable to bevelled picture frames, but not picture frames which did not have a bevelled edge.  Hows that for a memory :)

 

 

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By johnjenkins
18th Nov 2010 09:17

Not so long ago

when the police used to do a saturday morning raid on people who had not paid their NIC. Banged em up till employers or family came across with the readies.

Wierd , you could be put in prison (still can I suppose) for non payment of NIC but not Income Tax.

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By The Black Knight
18th Nov 2010 09:29

old Dragons ?

CD.  You are still young in dragon years.

I have seen a book of NI stamps in an old set of records. lol

Surely what we really need is lower tax and less grey areas ? the maths is already quite simple.

We are also forgetting that those that seek a legitimate advantage by seeking professional advice are less inclined to seek the advice of just put it in your back pocket and don't tell anyone.

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Rebecca Benneyworth profile image
By Rebecca Benneyworth
18th Nov 2010 11:11

NI stamps

I was brought up in a rural sub-post office and remember selling NI stamps as a 10/11 year old helper. My first experience of accountancy (little did I know it) was "balancing the books" for my mum at about 11. Weekly balance and then big monthly balance. (in £ s d too!)

As a broad brush I'm in favour of most of Vaughn's suggestions!

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By johnjenkins
19th Nov 2010 10:26

Rebecca

Only £ s d. I had to deal with halfpennies and farthings. My first job in accountancy was a sweetshop. Well every junior had to do it. Junior partner thought it was hilarious us counting and weighing, then costing. He could never understand that when I did it all the sweets were exact weights, never over - yum yum.

Returning to the matter in hand, if the Irish don't want the money perhaps we could make good use of it!!!!!!!!!

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By cymraeg_draig
19th Nov 2010 23:23

Why bother

Does anyone actually believe that the tax system or HMRC will ever improve ?

The whole system has been in decline for 30 years and, in my view, given the muppets now in charge of HMRC, I think that the decline is terminal.  In 10 years time HMRC will be gone, our tax syatem will be gone, and we will all pay federal taxes directly to the treasury in Brussels.

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By johnjenkins
22nd Nov 2010 14:05

Sooner

than that WD.

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By The Black Knight
22nd Nov 2010 14:29

lets hope its soon

I for one, am fed up with all the fannying around.

The UK will perhaps be a dorm for retired civil serpents (what have I said now).

The UK is finished those that can leave should !

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By johnjenkins
23rd Nov 2010 09:46

Great

At least we now know where our Governments £7 Billion cuts are going.

There's me thinking that this lot would squander it !!!!!!!!!!!!!!!!!!!!!!!!

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By sajidsaeed
08th Feb 2012 08:37

Merger of NIC and Income Tax

 

In particular, any reform of NICs to an annual, cumulative and aggregated basis to match the income tax structure could mean a significant number of individuals would end up with a different NICs liability – some could pay more and others less. On the one hand, there are around nine million individuals in the UK who currently work less than a full year. Many of these individuals would pay less NICs if only one NICs threshold was applied each year. Some of these individuals might find their contributions record is affected, though they would be able to compensate by paying voluntary NICs. On the other hand, there are nearly three million individuals who work more than one job simultaneously. They would be likely to pay more NICs if only one NICs threshold were applied across multiple employments. Some of these individuals would find themselves eligible for contributory benefits for the first time. And there are over seven million individuals who have earnings that fluctuate across NICs thresholds within the year.

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