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Will income tax and national insurance merge?

Tax simplification urged in pre-Budget report

A pre-Budget report from the Office of Tax Simplification (OTS) has suggested George Osborne, the Chancellor of the Exchequer,  should merge income tax and national insurance. The move would reduce administrative costs to firms and make tax easier to understand it is claimed.

Current system costly

Income tax and national insurance are currently collected separately. In terms of current tax rates, individuals pay tax at 20%, 40% or 50% depending on their income. Most employees also have national insurance deducted from their earnings over £5,715 at 11%. In April 2011 this will rise to 12%. Earnings above £43,875 currently have national insurance of 1% levied on them. This rate will also rise by 1% in April.

Those aged 65 or above do not pay national insurance, although they do pay income tax on their pension or other income. 

Although national insurance is nominally a charge to support state pension and benefits, it has long been regarded as simply another tax on earnings. The OTS points out the high administrative cost of the current system and its report identifies merging tax and national insurance as a ‘priority area for structural reform’. 

John Whiting, Tax Director for the Office of Tax Simplification said: ‘Our aim is develop practical ideas that will make things easier for small businesses when it comes to their tax responsibilities.’

No immediate change

While the OTS interim report spells out the savings to be made by merging tax and national insurance, it recognises that any integration will be a gradual process. The treatment of those aged 65 and over is a major problem, as is the retention of national insurance contributions as a qualifying criteria for full state pension. The suggested flat-rate state pension hinted at this week by the Works and Pensions Secretary, Iain Duncan-Smith, may make integration easier but the date for this remains unclear.

More details of the government’s intentions may emerge in George Osborne’s Budget speech on 23 March. As the OTS report states: ‘Ultimately, it is for the Chancellor to decide on changes to tax law, which would then be subject to the normal Parliamentary process.’ 

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