Budget 2024: National Insurance cut was a missed opportunity for simplification

Susan Ball, employment tax partner at RSM UK, responds to yesterday’s budget announcements on National Insurance:

With less than four weeks to go until the National Insurance Contribution (NIC) rate changes, employers will have their work cut out to implement this in time for April payroll runs. Last time changes were implemented businesses were given six weeks, and this was still a challenge for some. Taking the Easter holidays into account, employers may struggle to implement this change effectively. The legislation will need to be passed in a matter of days to enable them to meet new requirements. 

For employers, it’s advisable to issue communications to their workforces. These should inform employees about when they can expect the change to be applied. If employers outsource their payroll, we recommend employers check these changes are reflected in their employees’ payroll. Employers should also ensure that their payroll adjustments are robust if running their payroll internally. 

National Insurance is calculated on a pay period basis, so capturing accurate information from employers is crucial so payroll can ensure payments are subject to NIC at the correct rate and time. Employers that don’t amend their payroll system in time will need to rectify this in subsequent pay periods, so employees receive the full benefit of the NIC cut. 

The Chancellor said in his Budget speech ‘If you get your income from having a job, you pay two types of tax – National Insurance Contributions and Income Tax. If you get it from other sources, you only pay one. This double taxation of work is unfair.’ Many tax advisers held their breath, thinking this just might be the start of an announcement on merging income tax and NIC, but they were quickly disappointed with what followed. The chancellor didn’t even align the rates for employees and the self-employed. 

Differences between the two taxes has long been identified by many, including the OTS, as too complex. The case for merging income tax and NICs remains strong in terms of transparency, administrative simplicity and understanding. NIC is now the only tax with devolved governments that the chancellor can use to give a benefit across the board to all those in work. 

If the chancellor is going to move to one tax rate in future, we can expect to hear more on this soon, possibly Tax Administration and Maintenance Day on 18th April, or failing that a consultation over the summer. Either way, he will need to move swiftly to sign-off on any changes before the next general election.

One big question to answer is whether the devolved governments will retain the same control over their rates of income tax if National Insurance is removed or merged?

In addition to this, benefits such as the state pension are calculated based on National Insurance contributions that have been paid, so this will also need to be addressed. There are feasible solutions that involve legislative and administrative adjustments, so with careful consideration these challenges are not insurmountable.