21 Mar 2011

10 mammoth implications of merging National Insurance with Income Tax

When the creation of 100,000 work experience placements becomes a central plank of a Budget, it is easy to see that the Government cup does not runneth over either with initiatives or particularly money to put behind policy ideas. Throw in the integration of National Insurance and Income Tax, an act of tax simplification, and cup looketh rather empty.
But do not underestimate the utterly radical potential of this idea, which will be unveiled as a medium term objective by the Chancellor at the Budget on Wednesday.
1. It should end the facile competition to pledge not to increase the headline rates of income tax, which robbed government of its most potent tax weapon, and instead sent national insurance higher.
2. Savers and pensioners could share the burden of tax rises alongside workers. National insurance is a tax on hours worked, it is inherently biased in favour of wealth and away from working.
3. The per week basis means that National Insurance is currently payable by students doing summer jobs even if their annual earnings are well below the income tax threshold. Clearly absurd. Why do the self-employed pay two different rates?
4. Some honesty about the break in the contributory principle, a century on from the creation of National Insurance by David Lloyd-George. Need there really be an unfortunate worker in the Longbenton NICs office totting up every eligible contribution?
5. Employers national insurance could become a straightforward payroll tax
6. What happens to contracting out? Is there any justification for lower NICs payments (9.4% v 11%) in the new world of a flat state pension? The Office of Tax Simplification’s recent report suggested that £9.1 bn per year could be saved
7. If the coalition aim is to take everyone earning below £10k out of the tax system, then the primary threshold for National Insurance will also have to rise to the equivalent of £10,000
8. 50p tax rate abolished? Well not really, the higher rate of tax, under honest taxation will be 40p plus 2p NICs, which equals 42p, kicking in at £42,400. The top (50p) rate is actually 52p, including NICs, kicking in at £150,000. So under the guise of tax reform the Government could easily “abolish” the 50p rate, whilst creating an actual top rate of, say 45p.
9. 32p rate of tax on pensions and savings? Not a great vote winner – but what is the rationale for taxing work markedly differently from income that derives from wealth?
10. This type of merger actually offers the Government to reset most of their agreements and commitments on tax, under the guise of tax simplification.
To be clear, the Chancellor will not be announcing the abolition of National Insurance on Wednesday. But the process that he will start at the Budget could be much more that a fiscal tidying up exercise. It’s worth watching.

Follow all the coverage on Channel 4 News, and look out for our ‘Spending Cuts Map’, your chance to show how the budget effects you.

8 reader comments

  1. Tim Coldwell says:

    Maybe scrapping Tax Discs for road vehicles and adding tax to insurance as in France (~50%) would be both more efficient and progressive?

  2. Ian says:

    People say that merging means tax at 32 and 52% based on current rates. Governments should be reducing the overall tax rate. Why not 25 and 45 % as a start and a promise to reduce the UK to a low tax rate state over say 5 years.

  3. Frances Coppola says:

    Generally in favour of this idea, principally because it would finally bury the myth that people “save” for their pensions through National Insurance. They don’t, and never have. NI is just another tax. Abolish it.

  4. Richard Murphy says:


    See http://www.taxresearch.org.uk/Blog/2011/03/21/we-dont-need-to-get-rid-of-nic-we-need-an-investment-income-surcharge/

    a) What about pensioners?

    b) Self employed pay less as they get reduced benefits

    c) There is no simplification if there’s still a payroll tax – that’s still 2 taxes for the employer to run – and to avoid

    d) A simple investment income surcharge solves this

    1. Andrew Dundas says:

      Unfortunately an investment income surcharge would not solve the politics. Pensioners receive an ‘investment income’ that’s not currently eligible for any NI: perhaps they should pay?
      Nor are savings accounts subject to NIC. Perhaps those should pay too?
      Thirdly, taxed investment incomes arising from foreign jurisdictions are not, by international agreement, subject to additional standard rate tax. Should that exemption be waived for NIC too?
      There’ll be numerous losers in this proposal amongst groups who’re also the most persistent voters. Can’t see Lord Snotty allowing this one.

  5. Martin J says:

    Point number 9 in the list mentions pensioners’ income “derived from wealth”. I have no wealth, just a very modest company pension plus the state pension. Why on earth should I have suddenly to pay tax at 32% rather than 20% on my total taxable income? Come off it!

  6. Saltaire Sam says:

    If George Osborne is proposing it, you can be sure that the wealthy will benefit, the poorest will contribute the highest proportion of their income and there will be plenty of loopholes so his mates end up paying nothing.

    Any sign of a land value tax to catch those who do nothing but watch the value of their estates increase above the rate of inflation?

  7. Mike says:

    Combining Income tax with NI to create a tax levy of 32% would mean pensioners not having the means to live. Most pensioners are not well off. Many do not have any security of a company scheme which generally do not pay out greatly.T The idea of one size fits all does not work. A fairer system would be to take account of peoples earnings even in retirement. Perhaps we should all emigrate.

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