The Chancellor's announcement that the Government will consult on merging the tax and national insurance schemes is a bold move. It is also surprising given that in 2007, the Government published its findings from an evidenced based review of such alignment, when it concluded that the costs would outweigh the benefits.
So what's new? It is quite clear that the Government is serious about reducing the burden of administration for business, following the appointment of the Office of Tax Simplification (OTS) - this being one of its key recommendations. But the political, technical and practical challenges are huge.
In theory it would be workable, but it all depends on what is meant by 'merger'. A single new tax rate would both highlight the 'real' rate of tax and NIC borne by individuals, together with the fact that the differential between basic rate and higher rate tax payers is not really 20% but only 10%.
Secondly, the social security regime includes numerous international agreements and is intrinsically linked to individuals' benefit entitlements.
A third challenge relates to the numerous areas where the tax and NIC rules differ. For example, the NIC rules treat self-employed individuals as employees in some cases, where the tax rules do not. Also, tax is calculated cumulatively, whereas NIC is based on earnings periods, normally a week or a month, although we already have annual NIC basis for directors. And of course the self employed pay NIC at a different rate to employees.
The other groups who will be want to be sure that they won't be worse off are pensioners (currently exempt from NIC) and savers (already hard hit by the current low returns on savings income).
It will take a lengthy consultation to consider all these issues fully and ensure no unintended consequences.
One can see a new regime where tax and NIC run side by side based on much more closely aligned rules. However, a fully merged tax and NIC system with a single combined rate of tax seems a bridge too far.
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