National Insurance contributions and Income Tax should be brought closer together to create a simpler and fairer system for business and taxpayers.
In a report published today, the independent adviser to government on tax simplification, the Office of Tax Simplification (OTS), reaffirms its call for this outdated system to be reformed to make it fit for the future.
Angela Knight, OTS chair, said:
As patterns of employment continually change, many more people are combining employment and self-employment: these different ways of working are with us, and so the current national insurance system is not just complicated but is simply out of date. It’s time to address this problem.
Our independent review has demonstrated though, that some will gain and others will lose from any change. By highlighting the need for reform and shining a light on difficult areas now, the OTS intends this review to trigger a full and informed debate about the challenges and the impacts, and how to create a system that is fit for the future.
John Whiting, OTS Tax Director, said:
We found near-universal support for reform to the NICs system with many seeing alignment as a simple and obvious step. The potential gains in easier administration, proper transparency and greater understanding are clear.
But the impact of change will be considerable: millions of people would pay more in NICs but millions would also pay less. Some paying more would gain contributory benefits but all these impacts need to be carefully worked through and thought about. More work is needed and so is a proper, informed debate about the considerable implications.
What is national insurance?
Taxpayers have been paying national insurance contributions to qualify for certain benefits such as the state pension, since 1911. It’s important they make enough contributions to qualify for these benefits. But it is calculated in a different way to income tax.
Why did the OTS review income tax and national insurance?
Taxpayers today have much more varied working patterns than they once did. National insurance was designed for the working patterns of yesterday, when a single job (often for life) was more common. The government asked the OTS to investigate whether national insurance could be simplified, to create both a simpler and a fairer system that supported modern working patterns. Today’s report builds on the March 2016 report and sets out the case for NICs reform, with an indicative five year timetable.
The OTS has found that:
- it is widely acknowledged that national insurance is out of date. It no longer supports modern working patterns, and creates unfair outcomes between taxpayers
- it is complex to administer, and this makes it difficult for taxpayers to understand how much they should pay and the impact it has on their entitlement to benefits
- a simpler, and fairer, system would treat everyone’s earnings in the same way, for both income tax and national insurance. This means that national insurance would be calculated in the same way as income tax, making it easier to understand
- this could change the amount some people pay, but would not raise taxes overall
- there is widespread support for the OTS’s reform proposals
- Today’s report from the Office of Tax Simplification on the closer alignment of Income Tax and NICs was laid in Parliament today, and is available here.
- The OTS’s previous report, published in March, on which this builds, is available here.
- The OTS was established on 20 July 2010 to provide independent expert advice to the Chancellor on options on areas where the tax system could be made simpler for everyone involved. It has been placed on a statutory basis with an extended remit in Finance Act 2017.
- The differences between IT and NICs have often been cited as a major source of complexity in the UK’s tax system. In the summer Budget in 2015, the OTS was asked by the previous Chancellor of the Exchequer to consider the impacts, costs and benefits and the steps necessary to achieve closer alignment. The OTS published its report in March 2016, setting out a 7-stage plan for reform. The previous Financial Secretary then asked OTS to consider reform of employee and employer NICs in more detail, to report before Autumn Statement 2016, and the government would then respond to the review in full.
- The OTS team is led by Chairman Angela Knight and Tax Director John Whiting and has a staff drawn from HM Treasury, HM Revenue & Customs and the private sector. Details and biographies are available on the OTS website. John Whiting will be retiring from the OTS in early 2017, and will be replaced by Paul Morton.
- The OTS started its work in September 2010 and has since provided recommendations to simplify tax in a number of areas throughout its reviews. More on the OTS reviews, including a summary of progress on the OTS’s 402 recommendations so far, can be found here.
Press enquiries only please contact:
Ed Rowley, OTS Press Officer
Phone: 03000 585028
Published: 14 November 2016