Monday, 30 June 2014

Stupid argument against merging Income Tax and National Insurance

Via MBK, from The Times:

Income tax and national insurance will be merged under plans being lined up as a key element of the next Conservative manifesto. George Osborne came “within a whisker” of implementing the plan in the budget and is now looking again at the policy for the general election...

There are fears, however, that the move, which would involve merging two computer systems, could cause another Whitehall IT disaster and lead to problems similar to those that have beset universal credit. Concerns over the software caused Mr Osborne to pull back from an announcement in April, according to informed sources.

There is no need to merge both systems; you just hike the basic rate of income tax to 32%, the higher rate to 42% and the additional rate to 47%, then you can shut down the parallel NI system entirely - Employer contributions don't go towards your "payment record" anyway.

Clearly, pensioners, landlords and people with savings income will be moaning about having their basic rate of tax increased, in which case you either tell them to put up or shut up (at least there is no Employer's NIC on those sources of income!) or you continue taxing them at the lower 20% rate (dividends remaining tax free for basic rate taxpayers).

Or, if you want to keep bureaucrats in work running two parallel systems, you could hike Employee's NI to 32%, 42% and 47% respectively and exempt their income from income tax, it comes to the same thing.

More promisingly, from City AM:

MERGING incomes tax and national insurance could be supported by the public, according to work announced today by PwC.

The firm arranged for a jury of 22 representative members of the public to discuss taxation for two days, and the group expressed support for the idea of merging the two taxes on income...

The focus group also indicated support for higher bands of council tax, along with the abolition of inheritance tax.

Amen to that.

Annual taxes on the value of land and buildings = good; taxes on transfers (Inheritance Tax or for that matter Stamp Duty Land Tax, Capital Gains Tax) = bad.

They still don't realise that VAT is the worst of both worlds: a tax on income/output and a tax on transfers, but hey.


mombers said...

A reason to get rid of the whole NI apparatus: You can suffer 22.7% tax on an income of just £112 in a WHOLE YEAR. NI is paid weekly, so if you work for 1 week, you get hit and there is no recourse to get a refund. My wife made just £3500 last tax year and had to pay. So much for lifting the low paid out of tax...

Bayard said...

"Or, if you want to keep bureaucrats in work running two parallel systems"

Yup, that's what the fuss is really about: there's a lot of bureaucrats, some of them quite senior (i.e. people who matter) who might be out of a job if the two taxes were merged.

Kj said...

FFS, how difficult can it be?

Mark Wadsworth said...

M, NI as a % of total earnings can be a much higher or lower figure, depending on whether your income is regular or irregular.

Low income = you pay less if you have regular income.

Very high income = you pay less if it's all in one week.

That is why they have "annual earning periods" for company directors, so they can't abuse the latter loophole.

B, as I said, if it's just a question of keeping bureaucrats in work, that is easily done.

Kj, amazing, isn't it, how they present an obvious solution as if it were a problem?

Anonymous said...

I'd like to see the maths behind mombers number. NI is only paid above the threshold, so if the weekly threshold is £112 then the NI paid will be precisely nil, no matter the payment schedule.

But the general point does hold true. NI is hard on part-time/flexible workers at the lower end. The Tories have figured out that income tax on people earning less than £10k is a bit wrong, but a lot of the working people who benefit will be paying 5%+ in NI (plus the employer bit, obv)

Mark Wadsworth said...

TTG, the maths is heinous.

If you earn £7,000 spread evenly over a year, you pay no NIC.

If you earn £7,000 in one week in a year, you pay £150 or so in NIC.

Those are the two extremes, top and bottom.

But if you earn £7,000 over three months in a year, you pay about £700.

It's a shit tax, the second worst tax after VAT.

Bayard said...

"Kj, amazing, isn't it, how they present an obvious solution as if it were a problem?"

Isn't that what Winston Churchill said about the Civil Service: "To every solution, a problem"?

mombers said...

@MW, isn't the NI bill on £7000 in one week £826.68? (£7000 - 111)*12%? And employer's contribution is (£7000 - 153)*13.8% = £944.89. Overall tax rate is an astonishing 22.3%. Granted it is an extreme case but it does illustrate the stupidity of the tax

Anonymous said...

@ mombers

Ees NIC drops to 2% above the upper threshold which is around £800 a week, so Ees on £7k in a week would be around £210.

There's no such limitation on Ers, though.

But yes, everyone is right, it's still an awful tax.

Graeme said...

but surely NI is there to fund the old age pension and it is therefore not a tax..../sarc