Jonathan Isaby: TaxPayers’ Alliance proposes merging National Insurance with Income Tax

Jonathan Isaby is the Political Director of the TaxPayers’ Alliance 

The UK tax system is, by all accounts, hugely complicated and in serious need of simplification. As if evidence were needed for this, look no further than the news this week that seven million taxpayers are each about to receive a letter from HMRC informing them that they paid the wrong amount of tax last year due to calculation blunders.

The TaxPayers’ Alliance has long believed that simplifying the tax system will play a vital role in contributing towards reducing the overall tax burden. To his credit, George Osborne , launched the Office of Tax Simplification last summer and in the Budget back in March announced a consultation on merging National Insurance with Income Tax, saying:

“We have for decades forced businesses large and small to operate independent NIC and income tax. This is an unnecessary cost and complexity on employers.”

Amen to that – and our latest report out today, Abolish National Insurance, examines that very issue of how to merge National Insurance and Income Tax.

National Insurance is virtually indistinguishable from Income Tax both in terms of its function of raising revenue for the Government from earned income and in the way it affects incentives for employees. Yet despite performing essentially the same task, it operates in a different manner in eight key ways (such as the collection period and definition of earnings) which adds unnecessary and expensive complexity.

More significantly, National Insurance obscures public understanding of tax on earnings, since most debates on earnings tax focus on Income Tax, ignoring both the employer’s and employee’s National Insurance Contributions.

Reforming National Insurance to align it with Income Tax would not only cut costs, reduce complexity and improve transparency, but also highlight the absurdity of having maintained both systems for so long.

Our proposal is for a two-stage merger of NI and Income Tax.

The first stage would operationally align the charges, publishing employers’ National Insurance on wage slips and renaming National Insurance to something which more honestly and accurately describes its function.

The second stage would simultaneously abolish National Insurance completely, mandate a reassessment of earnings to incorporate employer’s National Insurance Contributions and adjust Income Tax rates to collect the same revenues from the same individuals as before abolition: as such, pensioners, the self-employed and others who pay reduced rates of National Insurance would not pay a penny more in tax than they do at present.

It is a bold but perfectly feasible proposal which would make an ideal centrepiece for the Chancellor’s Autumn Statement on November 29^th. How about it, George?