The Office of Tax Simplification (OTS) has published “Closer alignment of income tax and national insurance: a further review” which sets out analysis and possible options for NIC’s reform.
The OTS recommend implimentation of the seven-stage plan as set out in their March 2016 report on alignment of income tax and NICs over the next five years.
- moving to an annual, cumulative and aggregate basis for NICs
- basing employers NICs on whole payroll costs and renaming the charge
- aligning the self-employed NICs more closely with the employees’ NICs – and benefits
- improving transparency for NICs and the contributory principle
- aligning the definition of both earnings and expenses for income tax and NICs
- bringing taxable benefits in kind into Class 1 NICs
- having a joined up approach for income tax and NICs laws and practice
This review also considers in more detail the impact of two of those stages as requested by HMRC namely :
- Moving employees’ NICs to an annual, cumulative and aggregated basis, similar to that for PAYE income tax.
- Changing employers’ NICs to a payroll levy.
Annual, cumulative and aggregate NICs
The review considers what the impact might be across different demographics: earning levels, ages, gender, industry sectors and location.
- About 5.5 million people would pay more NIC, £242 per year on average. These will tend to be those paid more than £20,000 and those with two or more jobs.
- About 7.6 million people would pay less NIC, £169 per year on average. These will tend to be lower earners and those working for only part of the year who will still benefit from a full year’s “NIC allowance”.
- Some of those paying more will have paid less than others with a similar income in previous years, for example because they had more than one job.
- The link between NIC and contributory benefits, such as the state pension, would have to be considered, as would the link with Universal Credit entitlement.
- A new “NICs code” would be needed, similar to the PAYE code.
Employer payroll levy
The review sets out a number of options for introducing a payroll levy, without identifying a clear winner.
- Flat-rate payroll levy.
- Replacing employer threshold with a cumulative annual employee allowance.
- Replacing employer threshold with a full-time equivalent employee allowance.
- Linking it to a percentage of employee NIC.