Aligning national insurance and income tax
The OTS has published the findings of a detailed review into bringing the two payroll taxes closer together.
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 today (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economy’, these different ways of working are with us, are expected to accelerate and so the current system is simply out of date.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.
John Whiting, OTS Tax Director, said:
We found near-universal support for reform to the NICs system with many seeing alignment as a simple and obvious step. The potential gains in easier administration, proper transparency and greater understanding are clear.
But the impact of change will be considerable: millions of people would pay more in NICs but millions would also pay less.
Some paying more would gain contributory benefits but all these impacts need to be carefully worked through and thought about. More work is needed and so is a proper, informed debate about the considerable implications.
The OTS’s seven key stages to closer alignment are:
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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
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base employers’ NICs on whole payroll costs. This would be easier to understand and reduce distortions from fragmented hours
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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
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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
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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
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in the same way, bring taxable benefits in kind fully into NICs to remove the distortions in the NICs treatment of non-cash pay
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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.
Further information
The independent Office of Tax Simplification (OTS) was established on 20 July 2010 to carry out reviews in order to provide expert advice to the Chancellor on options to improve and simplify the UK’s tax system. It is being placed on a statutory basis with an extended remit in the coming Finance Bill.
The differences between IT and NICs have often been cited as a major source of complexity in the UK’s tax system and, in this review, the OTS was asked by the Chancellor of the Exchequer in the summer Budget in 2015 to consider the impacts, costs and benefits and the steps necessary to achieve closer alignment. This builds on earlier OTS research which has often found that differences between of income tax and NICs is a significant cause of complexity for businesses. (In the OTS’s 2011 Small Business Review, the 2013 Review of Employee Expenses and Benefits, and the 2015 Employment Status Review.)
The OTS team is led by Chairman Angela Knight and Tax Director John Whiting and has a staff drawn from HM Treasury, HM Revenue & Customs and secondees from the private sector.
The OTS started its work in September 2010 and has since provided recommendations to simplify tax in a number of areas throughout its reviews.
Press enquiries only please contact:
Paul Conroy
OTS Press Officer
Phone: 03000 585028