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The closer alignment of income tax and National Insurance – OTS report

The closer alignment of income tax and National

The Office of Tax Simplification has published the findings of its detailed review into the closer alignment of income tax and NICs.



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The Office of Tax Simplification (OTS) has published the findings of its detailed review into the closer alignment of income tax and National Insurance (NIC). The review has identified that NIC is often too complex, not well understood and no longer supports the flexible working arrangements of the 21st Century. Consequently, the OTS has concluded that NIC is no longer fit for purpose in its current form, and will not be easily assimilated into a more digital tax system.

In light of this, the OTS makes a number of recommendations for the Government to consider in order to ensure a simpler, more effective system can be put in place to collect and administer income tax and NIC going forward. Any such change would not be straightforward, and the OTS notes that whilst some taxpayers would see their overall income tax and NIC payable decrease, others would face a net rise.

The report’s key recommendations (which are intended to be taken as a package) are as follows:

  1. Move NIC to an annual, cumulative and aggregated assessment method akin to how income tax is currently operated via the PAYE system;
  2. Base the employer’s NIC charge on the total payroll cost for the tax year, not individual employee pay (as at present). This would follow the approach proposed for the Apprenticeship Levy and is seen as a way of simplifying payroll calculations and ensuring the collection of NIC is as accurate as possible;
  3. Align the NIC treatment of the self-employed more closely with those who are employed;
  4. Critically review the contributory principle and improve taxpayers' awareness of the purpose of NIC and the benefits it gives entitlement to (e.g. state benefits, state pension);
  5. Align the definition of earnings, and reliefs available, for income tax and NIC purposes. Key areas to consider here will be the impact on benefits in kind and certain salary sacrifice arrangements, as well as pension contributions;
  6. Abolish Class 1A NIC and subject taxable benefits in kind to Class 1 NIC (employee and employer) to align it with the tax/NIC treatment of cash pay; and
  7. Harmonise the rules governing the administration of income tax and NIC, including setting up a method so that any changes can operate automatically for both taxes.

The report notes that internationally mobile employees pose a particular problem – particularly in the context of international social security agreements – and the report recommends that further work is carried out to develop specific recommendations to cover them.

Next steps

The immediate next step is for the Government to confirm whether or not it accepts the OTS’s conclusions. With the publication of the OTS report coming just over a week before the Budget, the timing may be too tight for us to hear its verdict then.

If the Government does decide to take the recommendations forward, then the OTS report itself identifies that there will need to be further work to establish the impact of any changes. Given the complexities, the report calls for “a full and informed debate on what changes are necessary, how they could be made and the timetable, the challenges for ‘loser’ groups and how we can make change as seamless and fruitful as possible”. There could be a lot more to come on this one, then.

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