A future Conservative government may merge National Insurance with Income Tax, in a move designed to ‘simplify’ the UK’s taxation system, the Independent newspaper has reported today (30 June 2014).
The move would see basic level taxpayers parting with over 32% of their total earnings, while higher earners would be asked to pay up to as much as 52%. Employer National Insurance contributions would not be affected by the change.
According to the Independent, Chancellor George Osborne considered introducing such a system in this years budget but later decided against the move, due to risks involved in integrating the two different computer systems.
However, the plan is now being considered by party chiefs for inclusion in the Conservative Party’s 2015 general election manifesto. It is believed that the new tax could be called an “earnings tax”.
A source close to the party told the Independent newspaper:
“We came within a whisker of doing this at the last Budget, but in the end we decided against it”.
“They are currently on two separate computer systems and we thought the risk was just too great. But it’s something we could do in the future in the next parliament.”
National Insurance is meant to be ring-fenced for welfare, pensions and the National Health Service (NHS), but the government is allowed to ‘borrow’ from the fund for other projects, if and when the need arises.
Monies generated for the Treasury through National Insurance contributions is widely accepted as being insufficient to cover the full costs of what it is intended for. This has led to successive governments having to dip into monies raised through general taxation to help cover the shortfall. For this reason, some senior Conservatives believe that the distinction between National Insurance and Income Tax has become blurred, and that the two systems should be merged into one.
The plan has been criticised by Labour’s John Mann – a member of the Commons Treasury Select Committee – who has compared it to “the sort of thing the Tea Party would come up with in the United States”.
“It would be disastrous”, he said. “People understand national insurance is covering social welfare, not least the NHS.
“Merging it with tax would be a long-term way of undermining the NHS. It’s the sort of thing the Tea Party would come up with in the United States.”
The Conservatives argue that merging the two systems “has the potential to remove economic distortions, reduce burdens on business, and improve fairness across individual earners”.
Politicians share concerns that a merger could result in elderly people paying National Insurance on their pensions. It could also affect the amount of tax people have to pay on their savings accounts and dividends.
My take on it
So here we have the Tory Boys trying to undermine, indeed do away with, the Contributory Principle
I know tax and national insurance (NI) can be confusing, so I will put it as simply as I can.
If the government align tax and NI this could cause problems for low paid workers, who currently “pay” a 0% rate on their earnings between the lower earnings limit (currently £111 per week) and the primary threshold (currently £153 per week)
So anyone earning less than £111 per week is not liable to NI, if you earn between £111 and £153 per week you are subject to a 0% deduction (more about that in a minute) and above £153 the NI is deducted on a sliding scale based on the level of your earnings.
The 0% rate is important, because even though you pay no NI, the 0% element is deemed to be a qualifying contribution which counts towards state benefits in the future.
There is no 0% rate for employers, they pay NI (secondary contributions) as soon as you reach the £153 or above per week, which is why the employer contributions are often referred to as a tax on jobs. It is important to be aware that employer contributions DO NOT count towards YOUR NI “account”, they go direct to the Treasury.
This mechanism does not exist with regards to PAYE income tax. The basic personal tax threshold is £9440 a year (£182 per week) so anyone earning that amount or less will pay no tax and tax at 20% will then be deducted on the amount above £182 per week.
So you can see that the protective 0 % mechanism you get with NI is not available with tax.
If it is decided to align the NI with the tax rates, then lower paid workers WILL lose out in the long term.
The trouble is, NI is not a tax or a duty, it is what it says on the tin, it is an INSURANCE, a civil debt. This means that if the Tories push ahead with the alignment they will have to completely amend the taxes management act, the PAYE (income tax) regulations, the Income Tax, Earnings and Pensions Act and completely overhaul the Social Security, benefits and Contributions Act and corresponding statutory instruments.
Why do they want to do this?
Well, I think that as the Tories are pushing people into self employment in order to massage the employment statistics, they’ve realised that currently, self employed individuals pay Class 2 contributions (Class 1, as I’ve described above, relates to earnings as an employee) which is currently £2.75 per week. So as you can see by aligning tax and NI thresholds, self employed workers will pay more.
The Tories … if it ain’t broke, they’ll break it!