One of the more esoteric suggestions in this year’s Budget was that tax and National Insurance could be merged.There is a lot of sense in this and it has previously been considered in government circles as a way of simplifying the way government collects money from us for essential spending.
The coalition has decided to undertake a consultation on the subject later this year and we thought it might be a good idea to look at some of the key issues.
There can be little doubt that the current tax system – including national insurance – is highly complex. Even if we disregard corporation tax, VAT, inheritance tax, capital gains tax and so on, the basic income tax regime requires time and effort to understand. When you add in the different thresholds applying to national insurance contributions, compared with income tax, especially when age allowances are taken into account, the whole area becomes a quagmire.
For most individuals, this is not something that we necessarily have to worry about, because deductions are taken from our pay, or an accountant sorts out the niceties for the self-employed. But for employers, the calculations, each week or month, can sometimes appear Byzantine.
Unification of the income tax and NI systems could make things so much simpler for them – and less expensive, which is one of the reasons it is considered, from time to time.
It must be admitted, however, that there are also potential downsides, not least that there are some things that can be set against income tax that cannot be allowed against national insurance contributions.
Pension contributions are made net of basic rate tax relief, so the rate should arguably be increased from 20% to 32%, which ignoring threshold differences would make it tax neutral – either more tax relief might be available, or there would have to be a different rate of relief, in which case the link to income tax would be lost (and the relief subject to attrition by future Chancellors).
For employees and the self-employed alike, higher rate tax relief on pension contributions can be deducted from the tax bill, whereas national insurance contributions are unaffected by however much you put into a pension. One option may be for higher rate tax relief to be removed – something that the Treasury has long been suspected of wishing to achieve – the other would be to have special tax relief rates for higher and additional rate taxpayers.
There are also considerations relating to pension and investment income, which are not subject to national insurance contributions – nor indeed are earnings, once you are past the state retirement age – so there would need to be differential unified tax rates in such cases. Similarly, the self-employed currently pay national insurance contributions on a different basis, so unless benefits can be homogenised, contributions cannot fairly be. But then, since employers make a contribution on behalf of employees, whereas the self-employed only pay a reduced ‘employee’ rate, giving the same benefits would be unfair to employees.
Would we really be better off?
When it really comes down to it, there may be too may difficulties to allow simplification. But whatever the case, it makes sense to ensure that you maximise your personal retirement planning now, in case of any changes to tax relief later.
When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.
Nothing in this article should be seen as giving individual financial advice.