Following the Chancellor’s pledge to reform the process by which income tax and National Insurance are paid, the Institute of Chartered Accountants in England and Wales have prepared a report which looks into the options for combining the two and simplifying the process of paying them. Their briefing paper provides an outline of four options for achieving the government’s stated goal and includes some details about the difficulties of integrating the two systems.
As the largest source of revenue for the government, income tax is one of the most important aspects of our country’s finances, with income tax accounting for £170 billion of the country’s tax receipts and National Insurance netting around £115 billion. Between them, these forms of taxation provide nearly half of the government’s income, with employers’ NIC forming around 10 per cent of the total tax receipts.
In order to merge the two, it will be vital to the government to ensure that the valuable contribution of both to the UK’s economy is not underestimated.
Part of the current problem is that National Insurance is widely considered to be a form of taxation, and although this is entirely justified in some senses, there are important distinctions: the origins of National Insurance, as the name implies, were as a form of insurance aimed to protect working people, and is therefore only paid on earned income paid in cash, or cash equivalent. This means that it is not payable by those over retirement age, those under 16 or any income which is considered an investment, such as dividends.
The idea to merge income tax and NI is not a new one and was originally considered by Nigel Lawson when he was chancellor in 1986. However, the time has not provided any easy answers, and the ICAEW was keen to point out that there is a lot of important decision to be made before any definitive decisions can be made. One of these is what to do with the existing National Insurance Fund, which is used to pay pensions, benefits and funding for the NHS.
The four options that the ICAEW have recommended include a full-scale merger; scrapping the plan to merge the two altogether and considering improvements to both; returning NIC to a separate insurance system, and carrying on with the current system whilst acknowledging that it may need changing in the future. There are details of how each of these options could play out and the impact they are likely to have, but it appears that the government has a long decision-making process on its hands.
If you want to be sure that you are paying the correct rate of tax and National Insurance, then using a specialist contractor accountant is a good way to make sure that you are fully compliant with all the relevant legislation whilst not paying more than you should be. To speak to one of our friendly and helpful team, call us today on 01253 362062 or email us at firstname.lastname@example.org.