A consultation on integrating national insurance with income tax was first announced in the 2012 Budget, scheduled for this summer and then postponed until the autumn. It’s November now, and it still hasn’t been launched. There’s also been no word on the white paper on state pensions reform, which may involve decoupling pensions from national insurance contributions. These long delays suggest reform may finally be on the cards at last.
The case for radical reform is overwhelming. National insurance is complex, opaque and costly. How many people know how much tax they have to pay? It can’t be healthy for so much smoke and so many mirrors to be put in the way of people seeing their true tax burden.
And it’s not as if maddening differences in the rules between income tax and national insurance serve a higher purpose. Quite the opposite. On top of scratching our heads while we try to do our sums, employers have to spend more on accountants and more on legal advice. These are not costs they welcome.
A survey of members by the Institute of Directors found 79 per cent agreed that national insurance and income tax “should be fully merged”. Employer’s national insurance contributions often mean the difference between hiring extra staff or battening down the hatches. It’s not called the “jobs tax” for nothing.
The 2020 Tax Commission, a joint TaxPayers’ Alliance and Institute of Directors project, today publishes a detailed three step guide, showing the realistic and practical measures needed to dismantle the system.
Firstly, we should make it transparent as soon as possible. From April 2013, let’s call national insurance what it is (another income tax); let’s stop pretending employer’s national insurance isn’t ultimately paid by workers; and let’s be upfront and put it on payslips.
Secondly, from 2015 we should radically simplify the rules so that only one set remain, applying to both income tax and national insurance.
Finally, from April 2017, let’s scrap national insurance entirely and, for earnings on labour only, amend income tax rates so that everyone pays the same amount and nobody has to pay more. Pensioners and investors shouldn’t have to pay more tax on savings, dividends and pensions just because we’re going to be honest about the true tax bill on wages and salaries.
Reform should go hand-in-hand with rate cuts and more generous tax-free allowances to ensure that everyone benefits. And cutting national insurance is the sort of serious supply-side measure our spluttering economy and worrying unemployment queues need. Our tax system is fiendishly complicated and urgently needs major reform. We’ll soon find out whether Osborne will grab the devil by the horns.
Rory Meakin is head of tax policy at the TaxPayers’ Alliance and lead researcher to the 2020 Tax Commission.