The Office of Tax Simplification has set out a number of steps for achieving closer alignment of NICs and income tax. The key findings of the report, which does not consider the option of a complete merger of the two taxes, are:
· the current NICs system no longer supports the UK’s flexible workforce model, diverse business structures and flexible reward;
· the inherent complexity of NICs means the regime (and the contributory principle) is not well understood by employers or individuals and is complex to administer; and
· there is a distortion built into the system, largely around employment/self-employment, such that two individuals with the same gross income may have very different NICs outcomes and possibly different benefits entitlements, while some employers use the NICs structure to decide work patterns (part time/self-employed).
The OTS’s seven key steps to closer alignment are:
· move to an annual, cumulative and aggregated assessment period for employee NICs, as for PAYE and income tax;
· base employers’ NICs on whole payroll costs, making them easier to understand and reducing distortions from fragmented hours;
· align more closely the NICs position for the self-employed with that of employees, removing complexity and potentially delivering more benefits;
· critically review the contributory principle, but first increase understanding of what it really does, i.e. feed the consolidated fund for general purposes;
· align the definition of earnings for income tax and NICs and the reliefs available for income tax and NICs, making them more equal for employees and cutting the burden of managing the differences for employers;
· bring taxable benefits-in-kind fully into NICs to remove the distortions in the NICs treatment of non-cash payments; and
· harmonise the rules governing the management and administration of income tax and NICs, including setting up a method for any changes to operate automatically for both taxes.
Constraints on administrative harmonisation include parliamentary procedure governing the scope of Finance Bills and the new NICs treatment of internationally mobile employees, involving apportionment to arrive at the disregard for non-UK earnings.
Based on available figures, the OTS estimates these changes would mean 6.3 million people paying more in NICs, but 7.1 million paying less.
Welcoming the proposals, Colin Ben-Nathan, chair of the CIOT’s employment taxes sub-committee, calls on the government to ‘grasp the nettle’ of aligning income tax and NICs. The OTS report ‘sets out a much needed roadmap’ for simplification, which would ‘reduce the cost on businesses, employers, individuals and HMRC’ and ‘enable swathes of the NI legislation to be repealed from the statute book’.
On employers’ NIC, Ben-Nathan sees merit in ‘the radical suggestion of discarding the secondary threshold and instead basing the charge on total annual payroll costs with an “employer’s allowance” of £675,000 and a flat rate of 13.5%.’ He explains: ‘This would exclude the vast majority of employers from the tax and leave only the 10,000 largest employers paying it with 1.54 million smaller employers having no liability. This would be a huge and welcome simplification for the vast majority of employers.’ See http://bit.ly/1SusMFz.
The Office of Tax Simplification has set out a number of steps for achieving closer alignment of NICs and income tax. The key findings of the report, which does not consider the option of a complete merger of the two taxes, are:
· the current NICs system no longer supports the UK’s flexible workforce model, diverse business structures and flexible reward;
· the inherent complexity of NICs means the regime (and the contributory principle) is not well understood by employers or individuals and is complex to administer; and
· there is a distortion built into the system, largely around employment/self-employment, such that two individuals with the same gross income may have very different NICs outcomes and possibly different benefits entitlements, while some employers use the NICs structure to decide work patterns (part time/self-employed).
The OTS’s seven key steps to closer alignment are:
· move to an annual, cumulative and aggregated assessment period for employee NICs, as for PAYE and income tax;
· base employers’ NICs on whole payroll costs, making them easier to understand and reducing distortions from fragmented hours;
· align more closely the NICs position for the self-employed with that of employees, removing complexity and potentially delivering more benefits;
· critically review the contributory principle, but first increase understanding of what it really does, i.e. feed the consolidated fund for general purposes;
· align the definition of earnings for income tax and NICs and the reliefs available for income tax and NICs, making them more equal for employees and cutting the burden of managing the differences for employers;
· bring taxable benefits-in-kind fully into NICs to remove the distortions in the NICs treatment of non-cash payments; and
· harmonise the rules governing the management and administration of income tax and NICs, including setting up a method for any changes to operate automatically for both taxes.
Constraints on administrative harmonisation include parliamentary procedure governing the scope of Finance Bills and the new NICs treatment of internationally mobile employees, involving apportionment to arrive at the disregard for non-UK earnings.
Based on available figures, the OTS estimates these changes would mean 6.3 million people paying more in NICs, but 7.1 million paying less.
Welcoming the proposals, Colin Ben-Nathan, chair of the CIOT’s employment taxes sub-committee, calls on the government to ‘grasp the nettle’ of aligning income tax and NICs. The OTS report ‘sets out a much needed roadmap’ for simplification, which would ‘reduce the cost on businesses, employers, individuals and HMRC’ and ‘enable swathes of the NI legislation to be repealed from the statute book’.
On employers’ NIC, Ben-Nathan sees merit in ‘the radical suggestion of discarding the secondary threshold and instead basing the charge on total annual payroll costs with an “employer’s allowance” of £675,000 and a flat rate of 13.5%.’ He explains: ‘This would exclude the vast majority of employers from the tax and leave only the 10,000 largest employers paying it with 1.54 million smaller employers having no liability. This would be a huge and welcome simplification for the vast majority of employers.’ See http://bit.ly/1SusMFz.
