In my earlier post, I outlined one of the more straight-forward outputs from the budget. If only this was the case for this one!

The Chancellor highlighted in his speech ‘that our tax code has become so complex that it recently overtook India to become the longest in the world’. So, good to see we are still world leaders at something then. A little later he went on to state ‘that there is one further step we should now undertake that will dramatically simplify the tax system’.

That change was the Government consulting on the principle, and practicality, of merging the operation of National Insurance (NI) and Income Tax.

Now, on the face of it this seems fairly logical. The Inland Revenue long since gave up the pretence that NI was anything other than a tax (albeit one where the payment of said tax created an expectation of certain benefits in return). So NI is just another direct income related tax. The calculation of NI does however unquestionably create many conundrums, as the various thresholds etc do not necessarily mirror those under income tax. Given this, it can be a burden administratively which impacts on employers, employees and, of course, The Treasury.

The proposed solution appears to be to simply lump NI on top of income tax (or at least this is how the media seem to be portraying this). But can this work? Unlikely. If Income Tax is 20%, and NI is a further 12%, then a ‘standard’ income tax rate of 32% seems sensible. Ignoring the differences in thresholds etc (which is something that can be relatively easily ironed out by government and legislation), this would be a very high ‘headline’ rate of tax for low to moderate earners, and although effectively the same cost to the employee could act as a disincentive to employment.

It would also mean that the Government’s bill for incentivising pension savings (which are of course tax free, with basic rate relief applied automatically even in contract based schemes) would raise markedly as the State would be required to part with 32% relief not 20% relief! Now, I’m pretty sure that the chancellor does not propose to increase the cost to the state as a result of these changes, particularly given the national deficit, so this is clearly a potential problem. Of course Government could limit relief, or impose some form of taper or transitional arrangements, all of which would make our tax code more, not less, complex. Lets not forget that the pensions savings gap is a real and present danger for HM Government, so they can’t afford to make pension savings more complex and/or less attractive to an already, often baffled, savings public.

Even if a simple solution is found to the above, and at the moment I can’t see one, employee’s NI is only part of the issue.

Potentially the bigger problem is around employer’s National Insurance contributions, which are often rightly seen by employers as a tax on jobs. Employers NI is a tax on the employer based on the employees income. If we once again take the premiss that the Chancellor does not intend such changes to reduce revenue, it follows that this huge income to the state would have to be continued within another taxation stream. The logical placement would be in increasing Corporation Tax accordingly. Seems sensible, but would be completely opposed to the generally accepted economic theory that low Corporation Tax attracts business to operate from the UK. This is important, and indeed George Osborne even commented on low Corporation Tax being an attraction elsewhere in his speech, so seems unlikely that this route would be followed.

Alternatively, if the Employer’s NI were rerouted to another taxation stream, then this will again create complexity, which is what the Government are trying to get away from.

All in all, this will be really tricky, and has the potential to make an already complex system even more complex. In reality, I think that change is a long way away, as any such change of this magnitude will require a long consultation, much negotiation within the Houses or Parliament, and a very long lead-in time so that all parties could ensure that it was implemented correctly. In reality, even if change comes, it may be following another General Election.

So in the short term, don’t worry overmuch about this. I will of course keep you updated as things progress. Meanwhile, there is a significant potential impact to consider on Salary Sacrifice, which I will cover separately in another post shortly.

Best regards

Steve