Why Osborne is so interested in merging income tax and National Insurance

Yosemite Sam

OK - but how is he going to deal with the pensioners? Politically, this is dangerous ground for Osborne, tax-paying pensioners are more likey to vote, and more likely to vote conservative. I have not yet seen a solution to this diffculty which will not create a storm of protest from, at least some, pensioners who do not at present pay NI. Be careful George - be very careful.

ROJ

The integration of tax and National Insurance is an excellent idea. It should have been done years ago.

There is one slight problem. If NI is abolished and the rate of income tax is increased from 20% to 31%, how will this affect people who now live on pensions and do not currently pay NI? Perhaps a different rate could be applied to income received as pensions, but it should be kept in mind that some pensioners rely to some extent on investment income rather than an income clearly definable as a pension.

If this idea goes ahead without full consideration for those who do not now pay NI, then the row will make Gordon Brown's 10p tax gaffe look like a tea party.

purpleline

This is a very smart move but I'd like Osborne to go further to take the rug from Labour so they can never do it again.

1) He should add a 1% Big society voluntary Tax which would be 100% voluntary.

2) As local government has completely attacked the coalition government he should include council Tax into the general taxation for workers. This would stop Labour controlled councils from over spending & eventually cut out local bureaucracy levels. with the council deriving its money from the actual Tax take of the population living and working in their country.

This could all be done via the private sector as well on cloud computing services.

I love Osborne and see him taking out Labour for ever. What a man.

Simon Stephenson.

It seems he's not exactly seeking to merge Income Tax with the whole of National Insurance, just the Employees' part of it, leaving Employers' NI as an undisclosed tax on income, just as it is now.

Taking Employers' NI into account, the basic rate of tax is nearer 40% than the 31% that you mention, and leaving it in place continues to give a future Labour government the opportunity to raise tax by stealth.

Puncheon

I agree with both posts above. This is precisely the mistake that the Major Government made when K Clark was Chancellor - he crucified the pensioners with low interest rates. Of course G Brown finished the job with the great pensions theft. In principle though it's a good move and will make the total direct tax take more transparent. We also need better labelling on consumer goods to show exactly how much the politicians are stealing from us.

Verity

He's got those funny, thin, weak fingers like Dave Jelloid.

Geoffrey HARRISON

"OK - but how is he going to deal with the pensioners? "

Oh really, this is not a problem. The CoE just adjusts the age-related allowance so that all pensioners pay the same tax at the new rate as they do now.

The idea that this hasn't been factored in is ridiculous.

The purpose of merging would be to save admin costs both for employers and HMRC. There is absolutely no reason for a merged tax to mean any class of taxpayers, except those beyond the reach of NI, ie very high earners.

Horatio

Is the pension issue really a problem? If it's still the case that interest income and earnings income are taxable at their own rates (although it so happens that tax currently set at the same rates, 20/40/50%), then maybe all one need to is specify that pension income should be taxable as 'interest' rather than 'earnings'. Surely not too hard to administer?

More of a problem to solve, I suspect, is how to cope with those in two or more employments, or with a combination of employment and self-employment. Failing some (probably messy) system of tax rebate or credit, it's difficult to see how such a taxpayer would not lose out. Currently the Class 1 NI thresholds apply to each unrelated employment, plus a nil-rate band for Class 4 on self-employment profits and the possibility of not paying Class 2 in respect of low levels of profits from self-employment (the Class 4 being at a lower rate than Class 1 NIC).

TrevorsDen

Pensioners - increase the amount they can earn before paying tax.

TrevorsDen

My own view is that Osborne should also set out a programme of income tax cuts based on targets for govt spending and the deficit.

Trevor

merging Tax and NI will aslo mean that landlords will pay 31p tax instead of 21p and overseas residents will get caught as they don't pay NI only tax in the uK

Richard Blogger

You thought selling Willetts' not-front-loaded £9k student fees to the public? Try selling 31p basic rate income tax to them!

Go ahead, George, Labour will be laughing from the sidelines.

2trueblue

Yosemite Sam. Pensioners do not pay NI at present, even if they are in full time employment. Osbourne would be totally stupid if this idea gained traction. The situation with the Child Benefit has not sunk in yet as it does not come into play for a couple of years. If Osbourne did combine both and this went ahead for pensioners the Tories will lose the 'grey vote, and very definitely mine! They need joijed up thinking.
Most people are aware of the fact that they pay NI and that it is just another tax. What people do not take on board is that their employers also pay another 13% or more on top of the employee contribution. IF the Tories think people are that stupid then they are in for a surprise. The 'grey vote' will take to the streets.

TomTom

In the 1970s the BASIC RATE of tax was 35% + NIC and the top rate 83% + Investment Income Surcharge = 98%.

The idea that people are confused about NETT pay and GROSS exists in the minds of journalists who probably cannot read a pay slip.

Most people complain about DEDUCTIONS. They are not fooled. They know they are paying for non-working immigrants and would tell Osborne a few home truths about where their taxes are squandered

arnoldo87

I imagine that Osborne will exempt pension payments and saving account interest from the combined tax.

Although this introduces complexity, which is the opposite of what the original idea sought to achieve, the lack of such an exemption really will cause trouble!

justathought

Alternatively you could argue that the very last thing people need now to to be reminded just how much they are being squeezed by the state, especially since respite is many years away.

arnoldo87

TrevorsDen and Geoffrey Harrison advocate the use of the tax free and age-related allowances to compensate pensioners.

It's not as easy as that. The cap applied to allowances on the over 65's would need to be scrapped, and the increase in allowance needed would be huge. For example, someone on a combined state and occupational pension of c£30K would need the allowance to DOUBLE to make up for the tax loss.

It will be interesting to see how Osborne deals with this on Wednesday.

Fergus Pickering

Do you lot really think that a Tory chancellor is going to raise tax from old buggers like me when that's where his core vote is? Screwing students (lefties) is a MUCH better idea. He may be rich but he ain't stupid.

Danny McRae

I'm a 60 year old male pensioner, drawing an income from an annuity, property rents, savings interest and dividends and pay no NI on these income sources. Increasing the effective tax I pay from 20% to 31% is not a vote winner. Contrary to the ill informed comments made by many in this column there is no simple approach that works such as raising age related allowances. Osborne must be nuts to think this is a good idea.

Charles

Pensioners could be given a greater personal tax allowance which should be keep thinks simpler to manage.

Big Jeff

There is no complexity for pensioners - they just get a different tax code, just like they do already.

JohnPage

We had these objections about pensioners on the other thread. There are several easy ways to get round the problem.

Having one highly visible combined rate of tax is absolutely the right thing to do, and it's also absolutely right that it has to be done now.

Labour will HATE it, so it HAS to be a good idea.

I find Osborne an unattractive personality, but this proposal is right on the button.

Next task: get Cable actually to start doing his job and cutting business red tape.

Baldwin

Surely the best way of not penalising pensioners is to provide a special pensioners' tax rate of 20%.

SD67

This is an excellent idea in principle but there are some practical problems.

1) Pensioners don't pay NI.

2) It's not just pensioners, it's buy to let landlords and self employed people who pay themselves a low salary and take most of their income as dividends. These people are a very large part of the UK economy and they tend to vote Tory.

3) Similarly to the above - what is the affect on the City? Is all financial income now taxed at 31% minimum? What will foreign investors think of that?

4) Employee's NI phases out after about £800 a week. It would be strange income tax system that went 31%/51%/40%.

The only way this could be done is as part of a ground up reform of the system. At a guess the base rate should be about 25% if it applies to everything, certainly not 31.

Hugh

Geoffrey Harrison
I like this approach, simple and should take a lot of people out of tax altogether.
A Living Pension, Free of Tax - sounds Good Conservative Policy, then add Transferability between members of stable long term partnerships, and you have a good Policy.

Ian

The UK needs a low tax economy to compete in the modern world. Tax should be simple to understand and completely transparent. The taxes should have been merged years ago. Hopefully at a lower rate that 32 and 52 % as well!

Libertarian Larry

Do you think employers care if they're paying that 13% NI contribution to employees or to the Treasury?
That 13% NI is a cost of employing people. It is exactly the same bracket of costs as wages and salaries as far as employers are concerned.
If Georgie really goes through with this and harmonises NI + Income tax, the cost of employment will fall dramatically, employers will be able to afford more staff and more people will be able to find work.
More people in work means more tax revenue and a larger economy. Higher tax revenue and a larger economy means affordable tax cuts.

George Osbourne is playing the long game here.

If this policy makes it to reality, the Conservatives will win my vote in 2015 again.

Memoriesaremadeofthis

"He's got those funny, thin, weak fingers like Dave Jelloid."

- Perhaps that's because he's never done a proper day's work in his life?

Jim

If George Osbourne thinks he's going to increase taxes on the self employed (currently paying £2-40/week, plus 8% on income from £5.7K to £43K and 1% thereafter) he had better give up the idea of ever getting re-elected.

Alessandre Bieri

If you factor in all the taxes that we pay on income the tax rates are 0% for a bit, then 39% (20% Inc Tax + both NIs), then 59% for a while, then down to 40%, then to 60% once you're over £100,000, then 40% above £112,000, then up to 50% over £150,000.

It would make it so much simpler to just scrap the lot, make the tax-free threshold £15,000 and have a flat rate of 45%. Everybody would pay less tax under this scheme, with the poor benefiting most

escapedRoger

At present a person who retires only needs to have paid 30 years NI, only a massive increase in the new tax threshold( lower limit ) will stop people losing out. Simplify, don't replace on complexity by another. Who were those people who didn't lump NI in with PAYE to work out how much the STATE was creaming off all these years?

Tim W

This is an excellent idea. It does annoy me though just how long these things take to implement - why several years?

One thing Osborne has always impressed in is his creativity. Everything he's done, from the inheritance tax cut, the jobs tax attack, to this - its always unexpected and seemingly an out-of-the-blue idea which people find they like. He'll never be a future leader like many are suggesting but he's turning himself into a potentially great politician.

graeme

WOW!!! and he says he is not going to increase taxes. There are huge numbers of people who have fixed incomes in this country. This could be a 12% increase in their tax bill. Makes the change from RPI to CPI for pensions almost insignificant. When will this govt wake up to the fact that people who have saved and thought they had made provision for the future are being hit hardest. We are not the rich bankers and manage to get by just!!!! No doubt they will send in the cruise missiles when we take to the streets.

Major Plonquer 1

I'm amazed that there are so many people commenting here who are simply innumerate. The change Osborne proposes will not change anybody's (including pensioners) tax PAYMENT. It only proposes to change the way tax is COLLECTED and the way it is PRESENTED.

If NI payments were hypothecated it would be a different story, but it isn't. And as G. Brown demonstrated NI can be used as the ultimate stealth tax to wring even more money from ordinary people without them even knowing or understanding.

Moreover, if you are self employed you effectively pay an additional 12% - the employer's contribution. So why would anyone want to start a business in the UK when they'd pay even more for the 'privilege' than they do in Communist China and North Korea?

Clive

This idea to merge National Insurance Tax with Income Tax (shall we call it NITWIT for short?)

Merging NITWIT will mean pensioners will lose out in a big way - unless you have much higher rates of tax for earnings than for investment income & pensions. That will please the workesr - not.

Messing around with Age Allowance will not do it. NITWIT could be George Osbourne's very own 10% tax moment.

CS

***One thing that Tory candidates—both successful and unsuccessful—were shocked by at the last election is how many voters who were net contributors to the state, thought they would benefit from ever higher public spending.***

I don't see the logic of that being a surprise. Unless Tory candidates have a natural mindset of I'm Alright Jack (which would NOT be a surprise). It surely all depends on what the higher public spending is spent on. If it were spent on a first class transport system, a first rate state education system, a first rate NHS, more police, etc...then it's presumably entirely possible for net contributors to the state to believe that they benefit from higher public spending.

Stephanie Tohill

"If you factor in all the taxes that we pay on income the tax rates are 0% for a bit, then 39% (20% Inc Tax + both NIs), then 59% for a while, then down to 40%, then to 60% once you're over £100,000, then 40% above £112,000, then up to 50% over £150,000.

It would make it so much simpler to just scrap the lot, make the tax-free threshold £15,000 and have a flat rate of 45%. Everybody would pay less tax under this scheme, with the poor benefiting most"

Why are you including Employer's NI as a deduction from the individuals salary in your calculations? Employer's NI is so called because it is suffered by the employer not the employee. Hence considering this when coming up with a flat tax rate for individuals will see them paying more, not less. Unless you think the individual should bear this tax and not the employer, which is hardly likely to be popular.

mark c

I support htis ocmpletely, but just as under Gordon there's a trap too. NI is currently capped, it's only paid on the first portion of income (like an inverse allowance) but of course making it a part of income tax would deftly and quietly remove the limit and improve the yield with barely any penalty politically. It's only suprising that it's not being played as a tax the richer harder card.

SD67

To MajorPlonquer
"I'm amazed that there are so many people commenting here who are simply innumerate. The change Osborne proposes will not change anybody's (including pensioners) tax PAYMENT. It only proposes to change the way tax is COLLECTED and the way it is PRESENTED."

The problem is that this is not what the OTS has proposed.

http://www.telegraph.co.uk/finance/budget/8393956/Budget-2011-Merger-of-NICS-and-income-tax-on-the-cards.html#

The OTS case for a merger explicity mentions eliminating the current incentives towards self employment, capital gains and dividends over salary income. ie a massive tax increase for anyone who receives income other than via a payslip.

If implemented without any corresponding reduction of rates this would be political dynamite for a Conservative government.

Dogzzz

The risk in this is purely one of communication. Labour and their PR wing, the BBC, will sell this as a double whammy.

1. Income tax raised to 31% a MASSIVE INCREASE
2. National Insurance scrapped means NO MONEY FOR HOSPITALS AND PENSIONS!!!

The coalition have to be very very careful how (and how often) this is explained to a grossly misled nation by the left wing media.

Dogzzz

Lots of speculation above about specific examples of who would be penalised under this and how it is going to be implemented.

Let's wait and see what is actually in the red-book before we start complaining about it.

Because at the moment, you could be right, or you could be making a fool of yourselves.

JohnW

You'd better make allowance for people who have completed their 30 years of N.I. contributions or you are dead in the water Mr Osborne.

Ian Walker

I wonder why income tax isn't levied against companies total payroll? That would certainly be a hell of a lot simpler all round, for companies and the revenue.

And then you could start talking about a flat tax rate across payroll, cap gains and dividends. No room for loopholes, simpler and fairer all round.

Simon Stephenson.

Stephanie Tothill : 6.48am

"Why are you including Employer's NI as a deduction from the individuals salary in your calculations? Employer's NI is so called because it is suffered by the employer not the employee."

But this is just a play with words, you know. Employers' NI is a cost of employment just as salaries and benefits in kind. If Employers' NI were abolished, and the revenue-gathering transferred to income tax, then what would happen is that businesses savings of NI would be paid out in higher salaries to compensate for individuals' additional income tax liabilities.

michael

Sneaky little stealth tax for businesses/ shareholders...
Dividends don't attract NI, just income tax.

It's difficult to tell how much this could cost push smaller less profitable, less corporation taxable businesses, and the number of jobs that may be affected to cover these costs.

Matthew

He won't do it.
It requires a bit of courage, which I don't think he has.
He'll go down the Brown route of tinkering around the edges rather than do anything meaningful.
After all, why not abolish road tax and just put it on petrol?
There's plenty of things that can be done for 'efficiency' but politicians *like* the complexity.
And Gideon is many things, but most of all he's a career politician.

michael

Will the starting/majority rate of 20% on benefits in kind including company cars rise to 31%....And at what longer term cost?

Cynic

As a pensioner, I feel a 10p tax moment coming on. Currently, as I'm retired, I no longer pay NI. If NI and IT are combined (I love the acronym NITWIT) then my tax bill will go up faster than under Gordon Brown - and that's saying something! Given that interest on my savings is virtually non-existnt (yet still taxed at 20%) and my income is fixed while my costs are rising, there will be no way the Conservatives will ever get my vote back if they increase my tax bill.

catsick

All these people moaning "it had better not effect me , pensioner , self employed etc etc are not seeing the wood for the trees. This is a great chance to make things fairer , yes a few will pay more and a few will pay less , at present the system is a mess and the tax rate jumps all over the place, those in paid employment are the sitting targets of the system while those on unearned income , dividends rent and yes pensions pay a lower rate.

Rolling everything into one income and taxing that makes a lot of sense, this will allow a lower total rate and much higher zero allowance.

I am sure that the zero rate set higher and a blended rate of what may be 29% will mean that the poorer pensioners will be better off and the government will have a chance to claw back something from those in high final salary schemes, if 60% of pensioners win I don't see how it is a vote loser.

I also dont see why a pensioner with a 50k income should pay less than a worker with a 50k income .

james c

This will be harder than Osborne thinks.The correct way forward is to ring fence NI-some of it for health and some for pension contributions.