Merging Income Tax and National Insurance under consideration

The Independent newspaper reported this weekend that the government is considering the merging of income tax and national insurance under plans to simplify the UK tax system.

A conservative source revealed that the Chancellor came close to introducing merging proposals in this year's Budget but decided against this because of problems integrating computer systems.  Senior Conservatives believe that the changes would make it clearer to taxpayers how much of their earnings are being handed over to the Treasury in taxes. The change would result in basic rate tax payers being subject to a 32% tax rate rather than a 20% tax rate and 12% national insurance. Higher-rate tax payers would be subject to a rate of 52%.

The National Insurance system was established in 1911 to enable employers and employees to contribute towards the cost of certain state benefits, initially illness and unemployment and later towards pensions and other benefits.  It is believed that the distinction is no longer relevant as revenue raised from income and other taxes is routinely used to meet the cost of the NHS.

This is not a new idea, a survey carried out by the Office of Tax Simplification in 2011 found significant support for the idea.  Whilst it is believed that the merging of the two taxes would be more transparent and reduce the administrative burden on employers, there would still be problems that need to be addressed such as how to protect pensioners who are exempt from paying national insurance and also the impact on savings accounts and dividend income which similarly are not liable to national insurance.