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George Osborne’s second Budget as Chancellor included a pledge to look at how National Insurance (NI) might be folded into income tax.
As widely anticipated in the run-up to Mr Osborne’s announcement to Parliament, the Government is to consult on the possibilities of reforms that would integrate the two levies with the aim of removing distortions created by the tax system, reducing burdens on business, and improving fairness for individual taxpayers.
A document will be published later this year to set out the differences in the NI and income tax regimes and how they might be addressed. The Chancellor said a merger, were it to happen, would result in NI contributions being charged neither on pensions nor savings income, but it would help make the UK tax system ‘fit for the modern age’.
Such a move would be ‘historic and… likely to take years to implement,’ according to Patrick Stevens, tax partner at Ernst & Young. ‘There will be a myriad of [sic] complexities to negotiate, not least the interaction with other social security systems around the world.’
A bringing-together of the two taxes would highlight the actual rate that people pay, claimed Mr Stevens. ‘For example, after the first £7,475 of earnings, tax will be charged immediately at 32%... This suggests that a lower intermediate starting rate, to ease individuals in to the system, may well be introduced in the foreseeable future.’
George Osborne claimed this afternoon that his Budget would be ‘fiscally neutral’ – an aim that Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants (AACA), insisted must apply to the folding of NI into income tax.
He also echoed Patrick Stevens’s remarks concerning tax rates, saying, ‘The 30% and 50% levels are psychologically important, and may lead to taxes being cut to bring rates below them.’
The president of the Charted Institute of Taxation, Vincent Oratore, congratulated the Chancellor on ‘finally grasping a nettle that successive administrations have shied away from.
‘However, we are disappointed that he has ruled out considering the abolition of the contributory principle. With the announcement elsewhere in his speech of moves towards a flat-rate pension, the burden of running the contributory aspects of the system may outweigh the benefits,’ warned Mr Oratore.
Mark Groom, partner in Deloitte’s employment taxes group, said pension contributions would be 'the key challenge'
'The single person income tax allowance is £8,105, while the equivalent allowance for NIC is around £5,500. To lift one allowance up to the other would be costly.
'Perhaps the greater challenge, though, is that National Insurance doesn’t apply to pension and savings income and won’t in the future either, which means full harmonisation can’t take place,' he added.
