The Government has published preliminary, guideline ideas for merging income tax and national insurance and is keen to collect evidence on the matter.
The Treasury described this is as an initial step, the aim of which is to create a base of evidence for ways in which the burdens imposed on employers of operating two different tax systems can be eased.
At the moment, the income tax and national insurance systems work separately from each other, but the Government believes that greater integration of the two has the potential to remove economic distortions, reduce admin for businesses, and improve fairness for individual earners.
The ‘call for evidence’ document asks 14 questions, the majority of which focus on the burdens employers and payroll professionals face in managing income tax and NIC payments through the Pay As You Earn system.
Examples are how much staff time and other resources are required to operate a payroll, which aspects of the process currently work well and how often problems are encountered when calculating payments.
David Gauke, Secretary to the Treasury, said: “The Government is committed to a programme of tax reform that aims to make the UK tax system the most competitive in the G20 for business, and simpler to understand for individual taxpayers.
“Greater integration of income tax and NICs will be a radical reform, but we believe that it has potential to bring real improvements.
“This is a first step in our consideration of this matter and we would like to hear from businesses and other stakeholders before we move on to further consultation later in the year.”
The Government acknowledged that income tax and NICs were introduced for different reasons and said it plans the two taxes will continue to have different rationales.
As the Chancellor made clear in the Budget 2011, the contributory principle that underpins the National Insurance system will be maintained. So NICs will not be extended to individuals above State Pension Age or to pensions, savings and dividends.
The document was welcomed by the Chartered Institute of Taxation (CIOT).
Anthony Thomas, the CIOT’s president, commented: “The Government deserve congratulations on finally grasping a nettle that successive administrations have shied away from. As the Office of Tax Simplification’s recent report showed, there are real administrative savings, for employers and for HMRC, in harmonising the way the two taxes are run.
“The Government’s approach of evidence-gathering over the summer, followed by a formal consultation document in the autumn, is sensible. There are risks to this process and it is right that the Government proceeds carefully. They are right to have ruled out extending NICs to pensions or to savings income at the present time, as this aspect could otherwise have overshadowed the consultation process.”
However, Mr Thomas warned that, within the boundaries set by the Treasury, there is need for the Government to think widely and to aim for real simplification.
The deadline for responses to the call for evidence is 19 September 2011.
The call for evidence document can be found at http://www.hm-treasury.gov.uk/d/condoc_income_tax_national_insurance_contributions.pdf
The cover sheet for responses is at: http://www.hm-treasury.gov.uk/d/condoc_income_tax_national_insurance_contributions__coversheet.pdf
