NICs and Income tax merger expected from Budget

CHANCELLOR GEORGE OSBORNE is planning to announce proposals to merge income tax and national insurance contributions in Wednesday’s budget in a move designed to simplify tax administration and cut collection costs.

He is expected to outline how he will merge the two and phase out differences between the tax and what is still technically a contribution towards welfare and pension provision. NICs are viewed as largely anachronistic because the reliance on a contributions record to qualify for and quantify for benefit entitlement has reduced in recent years.

The intention was leaked to the media over the weekend as Osborne sought in advance to define his financial package as “a budget for growth”, slashing the costs facing small and medium-sized businesses in particular.

The chancellor has already been advised in a report from the Office of Tax Simplification that a merger would be beneficial, though difficult.

The downside is the danger the resultant tax will be regarded as a tax rise, pushing marginal rates for some to more than 50%.

And with different thresholds and rules to be aligned, there is a danger that attention will concentrate on those who will lose out, including those with unearned income who at present pay no NICs and higher earners who try to “disguise” some of their earnings.

But the approach will make it easier to deal with the outstanding issue of IR35 and the taxation of the self-employed.

Osborne is also expected to raise the basic rate income tax threshold faster than the rate of inflation again in a further move to placate the Tories’ bruised Liberal Democrat partners, who set out the intention to move towards excluding all those earning £10,000 or less from tax altogether in the coalition agreement.

But it may be paid for by reducing the threshold for the higher (40%) income tax rate.

(Picture © HM Treasury/Crown copyright)