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In its latest report published, the OTS reaffirms its call for the ‘outdated system’ of NICs to be reformed to make it ‘fit for the future’. The OTS has been looking at moving to an annual, cumulative and aggregate (ACA) basis for employees’ NICs and basing employers’ NICs on whole payroll costs and renaming the charge.
The OTS believes that 'national insurance should be calculated in the same way as PAYE income tax. This means that both taxes would be calculated on an employee’s total income, on the same amounts. National insurance would not be calculated separately on each pay packet from each job, but on all jobs added together with one tax free allowance split between them'.
However, the group stopped short of recommending a merger of the two taxes. It acknowledged that this would create the most simple system for taxpayers, but said that national insurance has a different purpose to income tax and that the Government wished to keep them separate.
Winners and losers
The Chartered Institute of Taxation (CIOT) has welcomed the further work done by the OTS in support of its call for NICs and income tax to be more closely aligned. However, it says that an analysis shows that many of the winners under an ACA system, in that they would pay less NIC than before, are in the lower income bracket. But there are also some losers in that bracket who would pay more NIC, notably multiple jobbers. Some of the losers do gain more entitlement to contributory benefits, notably state retirement pension. Others may have their loss cushioned by receiving more Universal Credit to match the fall in their net earned income.
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.
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“We think that the proposal to move employers’ NIC to a payroll levy based on total payroll costs is sensible, and the OTS has produced some interesting analysis as to how this might be done, looking at the trade-off between the rate of the levy and the amount of employment allowance that may be available to each employer.
“We hope the Government agrees that this OTS report provides a solid foundation for further consideration of a move to an ACA approach for employee NICs and a payroll levy for employers’ NIC. And that it decides to take forward the other proposals on alignment of income tax and NIC included in the OTS’ March report.”
Major step
The Low Incomes Tax Reform Group (LITRG) also welcomed the report. Its Technical Director, Robin Williamson said: "The NICs system cannot carry on as it is if we are to achieve a much needed simplification of the tax system. The OTS’ proposals are a major step towards simplifying NICs and the interaction with tax on employment income, and make for some welcome greater transparency.
"People will have a better chance of knowing what they are paying, and what for, in contrast to the current confused picture, especially when to comes to taxpayers’ entitlement to benefits, for example.
“We urge the Government to make compensation available to any losers on the lowest incomes to help them in the transition. Much can be done by adjusting rates and thresholds, for instance by raising the primary threshold (the point at which people start paying National Insurance).
“The OTS’ proposals on employer NIC reforms represents a useful simplification. We call for the employment allowance/threshold for the new payroll tax to be set at such a rate as to protect low-income employers as far as possible, particularly care and support employers.”
Background
The Government asked the OTS to investigate whether national insurance could be simplified, to create both a simpler and a fairer system that supported modern working patterns.
This report builds on the March 2016 report and sets out the case for NICs reform, with an indicative five-year timetable. Its report published can be found here.
The OTS recommends the Government starts now 'to reform national insurance, to create a system that is simpler, works better for everyone and is fit for the future.
The next step is a wider public discussion on the implications for jobs and benefits, household income and the Exchequer
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Susie Hughes © Shout99 2016
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