Aligning national insurance and income tax

The Office of Tax Simplification (OTS) has published the findings of a detailed review into bringing the two payroll taxes closer together. Here’s what they have to say:

“Bringing National Insurance Contributions (NICs) and income tax closer together would create a simpler and fairer system for businesses and taxpayers, the Office of Tax Simplification announced Monday 7 March.

The Office of Tax Simplification (OTS) has published the findings of a detailed review into bringing the two payroll taxes closer together to create a simpler and more modern system.

It recommends a seven-stage programme to closer alignment to achieve a system more aligned to current and future working patterns, but cautions that the impacts need to be carefully understood and considered.

Angela Knight, OTS Chair, said:

People don’t know what the National Insurance Contributions they pay gives them in benefits, with the system giving different outcomes for the employee, the self-employed and those with more than one job. And employers – who are the collectors of income tax and national insurance – find the current system for NICs complex.

As the structure of the UK economy moves rapidly towards scenarios often referred to as ‘uberisation’, the ‘sharing economy’ or the ‘gig economy’, these different ways of working are with us, are expected to accelerate and so the current system is simply out of date.

Inevitably, some will gain and others will lose from any change. By highlighting both the need for reform and by shining a light on those difficult areas now, the OTS intends this review to trigger a full and informed debate about the impacts, how the changes could be made, how the challenges can be addressed and the timetables required, to make change as seamless as possible and to provide a system that is fit for the future.

The OTS review sets out seven key steps to more closely align NICs with IT but stresses the need for more work to be done on the proposed changes to properly assess the considerable potential impacts of change.

The OTS’s seven key stages to closer alignment are:

  1. move to an annual, cumulative and aggregated assessment period for employee NICs as happens with PAYE and income tax. This could mean many people paying more NICs and many paying less NICs
  2. base employers’ NICs on whole payroll costs. This would be easier to understand and reduce distortions from fragmented hours
  3. more closely align the NICs position for the UK’s 4.7m, and rising, self-employed with that of employees. This would remove complexity and could potentially deliver more benefits
  4. critically review the contributory principle, but first increase understanding of what it really does – and doesn’t – do; for example, finding people who believe that NICs pays for the NHS and that they need to have a full contributions record to qualify for NHS treatment is worrying
  5. align the definition of earnings for IT and NICs and the reliefs available for IT and NICs to make it more equal for employees and cut the burden of managing the differences for employers
  6. in the same way, bring taxable benefits in kind fully into NICs to remove the distortions in the NICs treatment of non-cash pay
  7. harmonise the rules governing the management of IT and NICs, and their administration, including setting up a method so that any changes can operate automatically for both taxes, to make it easier for employers and HMRC to administer the system and reduce unnecessary differences”

The OTS review concludes there would need to be a well-signposted path to this major reform with clear explanations to ensure all groups were well aware of the implications.

 

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