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Close alignment of income tax and NICS

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Newsletter Issue - April 2016

The Office of Tax Simplification (OTS) has published its recommendations on closer alignment of income tax and national insurance contributions. The report contains some bold recommendations for what would be a major reform of the UK's tax rules.

At summer Budget 2015, the government asked the OTS to look at options for aligning Income Tax (IT) and National Insurance Contributions (NICs). This followed on from recommendations made by the OTS as far back at 2011, and the latest report builds on earlier work of the OTS including the reviews of small business taxation and employee expenses and benefits.

Key recommendations made in the report include:

  • moving to an annual, cumulative and aggregated assessment period for employees' NICs similar to that for PAYE income tax;
  • replacing employers' NICs with a flat rate charge on employer's total remuneration costs. The Employment Allowance would be retained to remove some small businesses from the charge;
  • aligning NICs rates and thresholds between the employed and self-employed. This may mean the self-employed paying more NICs in return for better access to welfare benefits;
  • aligning the rules for IT and NICs for employees; for example, a common definition of earnings; similar treatment of business expenses; and the extension of Class 1 NICs to benefits in kind;
  • running IT and NICs as common, parallel systems. HMRC are encouraged to bring their IT and NICs teams closer together and to improve their guidance; and
  • making NICs more transparent. Few of us understand how our NICs are calculated, what they fund and what we are entitled to. Once this is addressed (perhaps as part of HMRC's digital plans) a decision should be taken on the future of the contributory principle.

If enacted, these measures would significantly change the calculation and collection of NICs, bringing NICs more in line with IT and simplifying the UK's tax system as a result. But this would mean major upheaval and create winners and losers the OTS estimates that moving to an annual, cumulative and aggregated assessment period for employees' NICs would mean 7.1 million workers paying less NICs (an average of £175pa) and 6.3 million workers paying more (an average of £275pa).

The OTS acknowledges that it will take time to achieve what would be a major reform of the UK's tax rules, and that a significant amount of additional work will be required to fully understand all of the implications of the proposed changes. The government will now consider the recommendations made by the OTS and we can expect a further update shortly.