Sunday, April 11, 2010

Election tax tease: National Insurance and Income Tax alignment

I've long criticised the way that Politicians try to imply that National Insurance is not a tax. So far as everyone who pays it is concerned it IS a tax.

What I dislike even more is when Politicians attempt to confuse the issue by referring to biased reviews and reports.

Four years ago, while Gordon Brown was still Chancellor, he announced in Budget 2006 that the Government would review the case for closer alignment of income tax and national insurance. The outcome of this review was the Treasury document, published in 2007: Income tax and national insurance alignment: an evidence-based assessment.

In Alistair Darling's Pre-Budget Report in October 2007 he reported that "the benefits of further alignment would be outweighed by the disadvantages." Whilst this was an accurate statement about the report it was misleading given the restrictions imposed on the Treasury's review!

In practice the Treasury were under instructions to take the current policy framework as fixed in stone. The rationale being that income tax and NICs have different purposes as NICs provide entitlement to contributory benefits. Thus, contrary to the hopes of many, the Treasury review had NOT considered any ideas in the context of merging income tax and NICs into one charge. The conclusion of the review was simply that further alignment, based on the pre-conceptions adopted within the report:
  • Would result in lower savings for employers than might be expected.
  • May adversely impact lower-paid individuals.
  • Would result in high costs for the exchequer.
The purpose of the document was only to consider how to make NICs operate in a similar way to income tax. The two areas specifically considered being a move onto an annual basis and collecting NICs by reference to cumulative income levels. A number of related administrative changes did follow. However many detailed rules continue to operate differently when computing income subject to income tax as distinct from NICs.

And, of course, the other practical problem is that it would be political suicide to scrap NI and as a consequence increase the basic rate of income tax, possibly upto 30%. Additionally Pensioners would need an exemption (as they don't pay NI) and an alternative method would be required to determine entitlement to those benefits and pensions that are dependent on your NI Contribution (NIC) record. So it's not as easy as some people seem to suggest. But considering the options should not be off limits. Do you agree?

Do you think it would be more honest to combine income tax and NICs? And to relate benefit entitlement to a feature of the income tax system rather than NICs themselves?

1 comment:

  1. Is it overly cynical to feel that if NIC and Income Tax were unified, then the government would be robbed of a good avenue for stealth increases?

    Increases in NICs generally tend to go unnoticed by the working public - or at least are not seen to be as "evil" as "tax increases".

    There can be no doubt that NI is a tax (ask me about the BBC License fee one day!), but it is marketed as something different. This marketing is further evidenced by the way employer contributions are wrapped up and to some extent hidden from the "average man on the street".

    Yes, they should be unified - and benefits tied to Income Tax (in my opinion), as long as the net result is a simpler system that is more efficient and thus cheaper to administrate - the only way to keep taxes lower is to spend less pennies collecting each pound.