Tuesday, March 22, 2011

Why Combine Income Tax and NI?

At the beginning of last week the Office for Tax Simplification (another new body, with an un-sexy name, but an important job), released its interim report into how to simplify the tax system. The coverage at the time was minimal (what with Libya imploding and Japan’s nuclear reactor’s exploding it’s hardly surprising), but since then and with the budget looming the media has suddenly started to pick-up on their most radical proposal, Scrapping National insurance in favour of a tax which combines National Insurance and income tax into one.

Why is this a good idea? Well firstly national insurance is quite complicated and calculating income tax deductions and national insurance deductions and completing the correct returns for the PAYE system is a time consuming process for business (especially smaller ones). In fact I am almost certain that there is research out there somewhere which shows that being responsible for the tax affairs of employees is one of the things that stops sole traders and one man band businesses from expanding into employers.

Secondly National Insurance is a tax that has had its day. It’s designed to act as an insurance payment, you pay in and get access to benefits and the NHS if you need them, if you don’t then your payments are paying for someone else to get them. Except you also get access to benefits and the NHS if you’ve never paid any National Insurance, because as a society we also look after the poorest and those that can’t work.

At present National Insurance raises £98.5bn a year against an annual welfare bill of £180bn and an annual bill for the NHS of £xxbn. In reality taxation from NI isn’t ring-fenced to pay for benefits and the NHS and if it was it wouldn’t be anywhere near enough anyway. It’s all just money for government coffers, and is just another form of tax on income with complicated rules and rates.

Removing National Insurance actually goes hand in hand with the benefit reforms which Ian Duncan Smith is currently pushing through. His suggestion that everyone will be entitled to a flat rate £140 a week pension removes not just the link to NI contributions over time, but also the complicated mechanism for NI top-ups, that make sure that someone isn’t left in poverty in their old age. So combining NI and income tax not only simplifies things on the employee side, but could also help reduce the huge bureaucracy which is required to administer our benefits system.

Finally of course if we do this then it’s more difficult for a future Labour government to put up taxes by stealth by increasing NI, because it’s all in one single payment. In reality at present the 20% tax rate, including NI is actually 32%, and the 40% rate is actually 52%. So not only would it be more difficult to put up taxes when we’re in opposition, but it’s also easier to convince people that they should be reduced when we’re in government.

So really it’s a win-win all round and something of a no brainer. My prediction is that the Chancellor will announce some kind of commitment to set-up a commission or inquiry into how this can be done in the budget, although who knows he may go further.

Bootnote: This was originally written last week and I've only just got around to looking up the tax income figures.

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1 comment:

  1. I think combining NI and IT is a good idea (provide we have differential rates for savings and self employed etc so we don't stifle people trying to provide for themselves)

    ....but there is no point in getting rid of employees NI, unless we also get rid of employers NI at the same time - then we will all realise that bottom rate of tax is about 45%....