A new report from the TaxPayers’ Alliance (TPA), published on Friday, is the latest to raise questions about the need for a continuing separate existence of income tax and national insurance (NI).
The low tax, small state campaign group argues the Government should abolish NI – both for employers and employees – saying it makes the tax system opaque, complicated and costly.
The Government has been taking evidence over the summer as part of its consideration of the integration of the operation of the income tax and NI systems, which the Chancellor announced at Budget 2011. This followed a recommendation to this effect by the Office of Tax Simplification in their Small Business Tax Review, published in March.
Since then, the Mirrlees Report, published under the auspices of the Institute for Fiscal Studies in September, has also made the case that income tax and NI should be properly integrated. Mirrlees noted that NI no longer serves any purpose as a separate social insurance contribution linked to benefit receipt.
At this stage the Government are only looking at how the operation of the two taxes can be integrated, which would cut down on admin costs for businesses and, potentially, tax collectors too.
At present, as all the reports point out, while income tax and NI are both taxes on income they are run via two separate systems and have rules that differ in many respects. Leaving aside rate and starting point differences, the biggest is perhaps PAYE’s annual, cumulative basis whereas NICs is still weekly/monthly, non-cumulative. And as the CIOT has pointed out many times, there are too many differences between the definitions of ‘income’ for the two levies.
The CIOT backs integration. In our response to the Government’s consultation we argued in September that “the inefficiencies and administrative burdens caused by the separate operation of the income tax and NICs systems need to be addressed and that the integration of the two systems should be a primary aim”.
We argue in our response that it is no longer necessary to maintain the separate ‘machinery’ (ie legislation, definitions, etc) to assess and collect NICs and definitions of earnings, deductions, etc can be aligned with the income tax definitions. NICs levels could also be amended through the Finance Bill rather than through separate social security legislation. However, we stop short of calling for the two levies to be merged (as the TPA are seeking). We believe the introduction of a single set of rules for the two levies – including making NI assessable annually – would dramatically reduce the admin burdens of having two levies, while enabling the Government to preserve the contributory principle and the ability to pay voluntary NI contributions as they appear to wish. This would also enable existing different treatments, such as of pension contributions, to continue to exist if the Government wishes, and avoid the need for complex renegotiation of the UK’s obligations under the EU social security treaty and bilateral reciprocal agreements.
There appears to be a momentum – as well as a logic – behind the integration of income tax and NI. The process offers scope for real simplification that can benefit employers, taxpayers and HMRC alike.
CIOT External Relations Manager
Monday 24 October 2011