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.

  1. moving to an annual, cumulative and aggregate basis for NICs
  2. basing employers NICs on whole payroll costs and renaming the charge
  3. aligning the self-employed NICs more closely with the employees’ NICs – and benefits
  4. improving transparency for NICs and the contributory principle
  5. aligning the definition of both earnings and expenses for income tax and NICs
  6. bringing taxable benefits in kind into Class 1 NICs
  7. 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.