Wednesday, March 23, 2011

Budget prediction: No immediate merger of tax and national insurance

It was inevitable that, due to a short holiday last week, I would miss the opportunity to offer timely comment and debunking of some key tax stories. As I'm back just in time for the Budget there seems little point in writing about anything else today.

However there is one point about which I've been unable to resist tweeting this morning:

We can safely ignore the scare stories about a merger of income tax and national insurance. The coalition Government will NOT advocate simply adding NI to IT. There will be a consultation and many wrinkles to iron out first.

Last week The Office for Tax Simplification published their interim report on small business tax. The executive summary notes that:
"genuine and long lasting simplification can only be brought about through major structural changes to the UK tax system. Our key recommendations are that the Government starts to look at reforming the structure and we recommend that a timetable be set out by the end of the year. The two key areas that require attention are:
  • The integration of income tax and national insurance contributions (“NICs”); and
  • Introducing a radical new approach to taxation for the very smallest unincorporated businesses.
Studies on how best to achieve this could be carried out, for example, by setting up a working party and through consultation with advisers and professional bodies within a specified timeframe."
At chapter 3 the report sets out the proposed integration steps - being the issues that would need to be considered and addressed:
  • Consistency in the definition of earnings;
  • Consistency in the required calculations;
  • Reliefs and exemptions on either income tax or NICs;
  • Treatment of pensioners;
  • Treatment of self-employment; and
  • Treatment of savings and dividend income.
Many commentators seem to assume that this would all be done in isolation. For example, they suggest that a new combined rate of IT and NI would be charged on all dividends - whether received by small business owners from their own companies - or by pensioners with investment income. This is wooly thinking and most unlikely in my view.

Even though the objective would be to try to retain the same level of aggregate tax (incl NI) I firmly expect this will involve changes to relevant allowances and reliefs.

I'll resist commenting further now as I anticipate we will hear more about this in the Budget - or more precisely, we'll read more about it in the Budget paperwork later today!


  1. I agree Mark.

    The transparancy of a 31% basic rate of tax is just too politically unpalatable.

    Watch for a fudge.

  2. Quite correct Mark. Consultation is to be set in motion later in the year. That is no doubt the correct move but it is annoying that the Government chose to brief journalists on the possibility of a merger happening much sooner than it ever can do.

  3. Cheers guys.

    @Iain - I think then journalists drew their own (incorrect) conclusions from the OTS report last week.

  4. In 1997, the Kyoto conference on climate change was just around the corner. This was potentially a big problem for the US losing face on the world stage so Bill Clinton went to Congress with his $6.3 billion Initiative on Global Climate Change.

    What this meant was that Clinton could look as if he was serious about climate change but actually do nothing and, better still, pass the problem to someone three terms of office down the line.

    Fast forward to 2011 and the UK Budget.

    Everyone knows National Insurance (NI) is just income tax in a very thin disguise. But actually admitting it means the basic rate of tax immediately becomes 31% - which it already is, but not officially. In short, political suicide.

    So George Osborne has taken a leaf out of Clinton's playbook - he's going to 'consult widely' and see what changes should be made to integrate income tax and NI.

    What this means is that Osbourne can look as if he is serious about tax and NI integration but actually do nothing and, better still, pass the problem to someone three terms of office down the line.

    Sound familiar?

    Sir Humphrey Appleby would be proud.