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.