OTS five year plan for aligning NICs and income tax

The Office of Tax Simplification (OTS) has published its second report on the closer alignment of NICs with income tax. This focuses on the two key recommendations from its March report, namely: calculating employee NICs on a cumulative basis similar to PAYE; and moving employer NICs to a payroll levy. The report finds the proposals would affect around 40% of employees, with 5.5m people paying more NICs and 7.6m people paying less.

The first report in March outlined a seven stage programme for achieving a simplified system. The current income tax and NICs rules were not designed for modern working patterns, with a growing number of people working in self-employment, multi-jobs and freelancing. This latest report provides more detail on the specific impacts of the employee and employer NICs changes and the policy challenges they will pose, highlighting the need for an informed public debate on the issues.

The key points of the employee NICs proposal include:

• Employee NICs would be based on an annual, cumulative and aggregated assessment period, similar to income tax under PAYE.
• Those likely to pay more NICs under this system (around 5.5m employees) would be people with more than one job, earning above £20,000.
• Those likely to pay less (around 7.6m employees) would be part-time employees, women, and people under 35 and in lower-paid employment.
• The changes would affect around 40% of employees in one way or the other.
• HMRC would need to issue a NICs code number to employees and employers, similar to PAYE codes for income tax, which would operate cumulatively through the tax year, with the annual NICs allowance allocated between multiple employments.

The OTS has published a separate design options paper for the NICs code, setting out in detail how this might work. Its preferred option is for a code which replicates the function of the PAYE code, but with a format sufficiently different to avoid the two being confused.

The report says employers do not expect to see the move creating significant additional costs, due to the streamlining effects, although a key requirement is that software changes to cope with the changes would need a two-year lead time. There will, however, be an impact on HMRC, which will have to make major system changes.

The employer NICs proposal includes:

• a total of nine different options identified by the OTS; and
• the preferred approach being a simple percentage charge (remaining at 13.8%) applied to total payroll costs, similar to the apprenticeship levy, with a cumulative annual employee allowance replacing the employer’s secondary threshold.

The report suggests that reform will offer modest administrative savings for larger employers, mainly because of the scope for combining or working in parallel with the new apprenticeship levy. Colin Ben-Nathan, chairman of CIOT’s employment taxes sub-committee, commented: ‘We think that the proposal to move employer NICs to a payroll levy based on total payroll costs is sensible. 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.’

The OTS does not see a single, clear cut solution, as each option has significant impacts. The report stresses that the government should now explore the wider impact of different options and choices. The OTS is at pains to point out that ‘we do not underestimate or seek to diminish the amount of work that will be needed to effect the changes we propose, nor their impact’. Nevertheless, the report concludes: ‘Nothing in the further work that we have carried out alters the overall conclusions in our March report: there is a need and an opportunity to reform the NICs system.’

The OTS believes its overall seven stage closer-alignment plan is realistic and has proposed a five year timetable, between 2017 and 2022. The stages are:

• calculating employee NICs on a similar basis to PAYE;
• moving employer NICs to a payroll levy;
• aligning the scope and definitions for income tax and NICs;
• the self-employed to pay and receive the same contributory benefits as employees;
• bringing benefits in kind fully within NICs;
• increasing transparency and understanding amongst taxpayers; and
• harmonising administration and legislative procedures.

See here.

The CIOT has welcomed the report, with its objective of reforming the NICs system to make it ‘fit for the future’. Ben-Nathan said: ‘Having two different systems charging tax on essentially the same income leads to duplication, complication and additional cost all round.’ However, he added: ‘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 NICs 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.’