NIC-income tax merger: cutting red tape or hiding tax rises?

Monday, August 01, 2011 | Posted by: Dave Jennings
Categories: Business, Employer, Personal | Tags: income tax, Dave Jennings, tax avoidance, NIC, consultation, National Insurance, Office for Tax Simplification, OTS, National Insurance Contributions, PAYE, Tax Investigations, Real Time Information, merger, pensioners

Integrating income tax and National Insurance will reduce the administrative burden on employers and stem the number of mistakes made in administering PAYE, says HM Revenue & Customs. Under a new ‘call for evidence’, you have until September 2011 to agree or disagree. Is this genuine red tape-cutting or a tax-raising agenda?

Although tax has been around for centuries, National Insurance Contributions (NIC) are a relatively new form of taxation, expanded in 1946 by the new welfare state system to provide benefits such as healthcare, pensions and unemployment. Under PAYE, contributions have been tied to the ‘pay period’ and other convoluted calculations, but have remained a separate deduction from income tax.

Then in March 2011, the Office of Tax Simplification (OTS) released its Small Business Tax review, in which it recommended closer integration of income tax and NIC.

The idea is to reduce the burden on employers of administering two separate deductions, each with different rules and deadlines. But there are significant benefits for HM Revenue & Customs (HMRC), too…

Reducing costs and tax avoidance
In this age of austerity, the Government envisages a reduction in PAYE administrative costs under the simplified system and fewer errors being made that result in loss of tax for the exchequer.

It also hopes to head off potential tax avoiders and reduce the number of costly tax investigations. One of the cornerstones of the OTS report is that having two separate tax systems “provides incentives to distort behaviour” and encourages taxpayers to make decisions based purely on reducing their tax liability.

A tax rise through the back door?
Inevitably, the proposed merger of income tax and NIC has led to concerns that there will be a tax rise through the back door: for example, for pensioners, who don’t pay NIC. The Government will have to balance any merger so that it does not raise taxpayers’ liability or lead to a fall in the tax take for HMRC.

To this end, the Government has made clear that the purpose of the reforms is not to increase the tax paid by any group of taxpayers, and that any changes will be ‘revenue neutral’. And Exchequer Secretary to the Treasury, David Gauke, has said that NIC will not be extended to those above State Pension Age, or to pensions, savings or dividends under the proposed reforms.

More than £95 billion in NIC is collected each year, so it remains an important provider of funds. Obviously, the headline issues about a combined rate are up for future debate as the Government is only collating views on the current burden of two systems at this stage.

Real-time information from 2013
Alongside possible changes to income tax and NIC, the Government is introducing Real Time Information from April 2013. This will require businesses to submit information to HMRC whenever employees are paid, as opposed to the current system where employers submit this information at the end of the tax year.

The Government expects this will also reduce the risk of errors and avoid the kind of damaging and high-profile problems with PAYE that have emerged over the past two years.

What do you think?
A formal consultation document is promised for later this year but in the meantime the Government wants to obtain evidence of the current burdens of two systems.

If you’d like to get involved in the initial call for evidence, the deadline is 19 September 2011. Visit HM Treasury’s consultation page to give your views – or let us know what you think here.

You might also find these posts useful:

* Compare the tax reliefs.com as the new OTS completes its review
* 10 ways to cut your income tax bill
* Tax traps and tax-smart ways to build a house in your garden