Another review of the income tax and national insurance system?

28 October 2015

Gary Heynes

‘The OTS (Office of Tax Simplification) needs your help’ is the opening line of a new consultation launched last week. It’s true they have not had much luck in the past five years in persuading Government to simplify the tax system, even on relatively minor matters such as the abolition of certain reliefs. Now, as announced in the summer budget, they have a major project looking at the 'closer alignment of income tax and national insurance'.

We have had almost 10 years of the idea of merging income tax and national insurance (NI), with no progress, but the government has asked the OTS to look this time at greater ‘alignment’.

The problem with tax and NI is that, while in most people’s pay they appear to both be a ‘tax’, outside of earnings they have very different impacts. NI only applies to earnings and even then it applies differently depending on the type of earning (employed or self-employed) and, for employees, how their employer rewards them. The rates and bands that apply to NI are also very different compared to tax; and what benefits are available, should things go wrong, depend on what NI has been paid. So the merging of the two systems has been fraught with complexity.

So what can we expect from an 'alignment' review? Some areas include the following:

  • Given that the OTS is looking at this, one would expect a simplified system – how many people understand the rates and bandings for NI, compared to those who understand the tax system?
  • Individuals start paying NI on earnings around £8,000, but only start paying tax from £10,600 – should these be aligned and, if so, how does the Government continue to collect at least the same amount of NI?
  • Self-employed individuals pay less NI overall, when compared to combined employer and employee contributions. Should this disparity be corrected and, if so, how?

Even an alignment of tax and NI will mean many winners and losers. Certainly, it’s very possible the Chancellor may view an alignment in order to fill the gap caused by the defeat over tax credits. With the move also resulting in an additional £300 in the pockets of those at the lower end of the pay scale, he may even emerge victorious.

These are just the first steps by the OTS in its review, but will this end up in the same 'no further action' pile as other recommendations? Quite possibly…