Potential NIC shake-up

According to a recent report from the Office for Tax Simplification (OTS), National Insurance contributions (NICs) and income tax should be more closely linked to create a simpler and fairer regime for both businesses and individuals.

The OTS, which was asked by the Government to investigate whether the system could be simplified, maintains that such a move would reform the UK’s “out-dated system” and make tax fit for the future.

As a spokeswoman for the organisation pointed out, NICs were designed for the “working patterns of yesterday”. She added that taxpayers today have much more varied working patterns than they once did.

Other bodies, such as the Chartered Institute of Taxation (CIoT), have welcomed the report, agreeing that a move to align the way that employee NIC is charged on earnings with the way income tax is charged on employment income would be beneficial.

However, there are some fears that moving to an annual, cumulative and aggregated (ACA) basis and charging employers’ NICs as a levy on total payroll costs could have a deleterious effect on those with lower incomes.

The proposals would result in around 5.5 million workers earning more than £20,000 paying higher NICs, to the tune of £242 per year, while 7.6 million would pay less. Employees who receive an annual bonus or are awarded a pay rise part way through the year would also end up with a higher bill.

The CIoT therefore suggests that it might be a good idea for the Government to raise the primary threshold for employee NIC closer to the level of the income tax person allowance so that the lower paid are protected.