Income tax and national insurance merger announced
The Government has announced plans to consult on reforms to integrate the operation of income tax and national insurance contributions (NICs).
Currently income tax and NIC have different rules, rates, limits and thresholds and separate reporting to HMRC. The Government announced a desire to merge the two systems in the future.
The Government is to consult with interested parties on the options, stages, and timing of what would have to be done to integrate the operation of income tax and NICs. A consultation document setting out the differences between the two current systems and the options to address these will be published later this year.
The Government’s intention is to remove distortions created by the tax system, reduce burdens placed on businesses, and improve fairness. It is acknowledged that the implementation of any changes will be complex and will need to address a wide range of issues.
In the case of NIC the contributory principle will be maintained and the NIC component of the future merged tax will not be imposed on individuals above State Pension age nor will it be imposed on other forms of income such as pensions, saving and dividends.
It is envisaged that this radical change to the tax and NICs systems, together with proposed reform to real time reporting of payroll will require considerable investment, the cost of which may in part be passed on to employers.
This merger has been mooted many times before but failed to proceed. The main reason was the political obstacle of admitting that the rate of the merged income tax would be 32%. All previous governments shied away from this reform.
In our view the announcements today raise as many questions as they answer. There could be increased tax for unincorporated businesses, and might the government seek to impose the higher tax on dividends from family companies?
Nothing has been said about the future of employer NIC – the cost that businesses bear on paying salaries. We assume this will be renamed as a payroll tax, and be computed using the same rules to calculate the new combined tax.
For more information please contact:
Senior Manager - Employment Tax Services