21 11 2016

UK Proposal To Merge Income Tax, Social Security Welcomed

The Chartered Institute of Taxation (CIOT) has welcomed support from the UK's Office of Tax Simplification (OTS) for its recommendation that National Insurance contributions (NICs) and income tax should be more closely aligned.

In a report published on November 14, the OTS reaffirmed its call for the "outdated system" of NICs (social security) to be reformed to make it "fit for the future." The OTS has been considering a move to an annual, cumulative, and aggregated (ACA) basis for employees' NICs and charging employers' NICs as a levy on total payroll costs with an employment allowance for each employer.

Colin Ben-Nathan, Chairman of CIOT's Employment Taxes Sub-committee, said: "We agree with the OTS that a move to align the way that employee NIC is charged on earnings with the way income tax is charged on employment income must be a good thing. Having two different systems charging tax on essentially the same income leads to duplication, complication, and additional cost all round."

"The weekly and monthly limits that apply for NIC also produce distortions which do not arise in relation to income tax. That said, changing to an ACA system for employee NIC will produce losers as well as winners and so careful thought will need to be given to the transition, particularly to the effect on the lower paid. One approach may be for the Government to raise the primary threshold for employee NIC closer to the level of the income tax personal allowance so that the lower paid are properly protected. Such a move will have to be judged against a potential cost to the Exchequer."

"We think that the proposal to move employers' NIC to a payroll levy based on total payroll costs is sensible, and the OTS has produced some interesting analysis as to how this might be done, looking at the trade-off between the rate of the levy and the amount of employment allowance that may be available to each employer."