Aligning national insurance and income tax

09 March 2016

The OTS has published the findings of a detailed review into bringing the two payroll taxes closer together which includes a seven stage closer alignment plan.

The Office of Tax Simplification (OTS) has published the findings of a detailed review into bringing the two payroll taxes closer together to create a simpler and more modern system.

The review recommends a seven-stage programme to closer alignment as outlined below, to achieve a system more aligned to current and future working patterns, but cautions that the impacts need to be carefully understood and considered.

1. Move to an annual, cumulative and aggregated assessment period for employee NICs as happens with PAYE and income tax. This could mean many people paying more NICs and many paying less NICs.
2. Base employers’ NICs on whole payroll costs. This would be easier to understand and reduce distortions from fragmented hours.
3. More closely align the NICs position for the UK’s 4.7m, and rising, self-employed with that of employees. This would remove complexity and could potentially deliver more benefits.
4. Critically review the contributory principle, but first increase understanding of what it really does – and doesn’t – do; for example, finding people who believe that NICs pays for the NHS and that they need to have a full contributions record to qualify for NHS treatment is worrying.
5. Align the definition of earnings for IT and NICs and the reliefs available for IT and NICs to make it more equal for employees and cut the burden of managing the differences for employers.
6. In the same way, bring taxable benefits in kind fully into NICs to remove the distortions in the NICs treatment of non-cash pay.
7. Harmonise the rules governing the management of IT and NICs, and their administration, including setting up a method so that any changes can operate automatically for both taxes, to make it easier for employers and HMRC to administer the system and reduce unnecessary differences.

The OTS review concludes there would need to be a well-signposted path to this major reform with clear explanations to ensure all groups were well aware of the implications.

The CIPP Policy Team will be consulting with the payroll profession on this so watch out for a survey in the coming weeks.

Read the full review - Closer alignment of income tax and national insurance contributions