The government are planning a shake up of the way people pay National Insurance.
The Treasury commissioned its independent adviser, the Office of Tax Simplification, to investigate increasing the efficiency of the NICs system. It published its recommendations this month and the consequences affect all UK taxpayers.
Why change national insurance?
The aim of the proposed changes is to simplify the current system of NICs collection, making it easier for taxpayers to understand how much they are paying and what their money is being spent on. The OTS’s main strategy is to turn the current, monthly NICs calculation into an “annual, cumulative and aggregate” amount. This aligns NICs with income tax processes and is intended to make the whole taxation system more transparent and less complex.
As Colin Ben-Nathan, Chairman of CIOT’s Employment Taxes Sub-committee, said: “We agree with the OTS that a move to align the way that employee NIC is charged on earnings with the way income tax is charged on employment income must be a good thing. Having two different systems charging tax on essentially the same income leads to duplication, complication and additional cost all round. The weekly and monthly limits that apply for NIC also produce distortions which do not arise in relation to income tax.”
Will you gain or lose money under the new system?
Within its report, the OTS suggests that 7.6 million taxpayers will pay less NIC, but 5.5 million will pay more. The question is – which category do you belong to? The devil is, indeed, in the detail.
CIOT’s Mr Ben-Nathan went on to say:“That said, changing to an ACA system for employee NIC will produce losers as well as winners and so careful thought will need to be given to the transition, particularly to the effect on the lower paid. One approach may be for the Government to raise the primary threshold for employee NIC closer to the level of the income tax personal allowance so that the lower paid are properly protected. Such a move will have to be judged against a potential cost to the Exchequer.”
Winners
Students, seasonal workers, some lower paid workers and graduates may be about £169 better off per tax year.
Losers
- 7million ‘middle income’ taxpayers will be £242 worse off each year. That’s those who earn over £35,000 and/or get a mid-year bonus or pay rise.
- Taxpayers with a full time job and freelance as self-employed in their spare time are currently not usually charged NICs on the little bit extra. But under an annual payment system, all their ‘on the side’ income will be incorporated into their total earnings and NICs charged on the total.
- The 2.4 million workers who juggle more than one job will also be impacted by the reform. At the moment, if you earn less than £8,060 then you do not pay NICs and you can have 2 jobs that pay that amount and not be charged. The reforms will merge the two salaries together and NICs will be payable on the total amount earned.
How will this affect employers?
The NICs paid by employers will possibly be renamed and incorporate the entire payroll amount, with a potential ‘employment allowance’ available to offset some of the cost.
Opinions..
The general consensus seems to be that, yes, we would benefit from a simpler taxation system; and marrying NICs and income tax processes seems to be a fair way to do this. But there is also concern over how many millions of taxpayers will be able to handle the negative impact of paying higher NICs.
ACCA
Head of taxation at the Association of Chartered Certified Accountants, Chas Roy-Chowdhury said: “Middle-class workers are really going to be affected by these changes. The Government really needs to be looking at the impact on them and must make sure they don’t lose out.”
Low Incomes Tax Reform Group
Looking at the other end of the salary scale, the Low Incomes Tax Reform Group said: ‘We urge the Government to make compensation available to any losers to help them in the transition. Much can be done by adjusting rates and thresholds – for instance, by raising the point at which people start paying national insurance.’
The Mirror
As reported by the Mirror, the Editor-in-Chief of Money.co.uk, Hannah Maundrell goes slightly further saying: “Taking such a sizeable chunk of earnings for the sake of simplifying calculations is a dangerous move at a time when prices are starting to rise and household incomes are beginning to be squeezed. The system is over complicated and does need sorting, but its important people don’t lose out. If the government do take heed and alter the way NI is calculated, I’d hope they’d offset the loss with a tax cut somewhere else.”
Office for Tax Simplification
The OTS themselves recognise the importance of further discussions before a final decision is made. One of their tax directors, John Whiting, said: ”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. More work is needed and so is a proper, informed debate about the considerable implications.”
These reforms could be ready to action in 6 years, now is a good time to take part in the debate.
