loveMONEY election manifesto: combine Income Tax and National Insurance
Merging National Insurance and Income Tax will not only save money, it’ll also create a more honest system. Here’s our case for making this long overdue change.
This article is part of our 2017 election manifesto.
How do you make the public think they’re paying less tax? By simply splitting their bill in two and giving one a completely misleading title, of course.
OK, so National Insurance and Income Tax were once paid by separate groups, but today the taxes are effectively interchangeable — including the way they are spent.
As John O'Connell, TaxPayers' Alliance chief executive, points out: “National Insurance is just another tax on earnings that hides the truth from taxpayers.
“Many are paying far more than they realise, blissfully unaware that their NI contributions are not being set aside for their retirement, but frittered away like the revenues from any other tax.”
So why keep them apart? In our manifesto pledge, we put forward three reasons why merging NI and Income Tax is the right thing to do.
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1. The current system is inefficient and outdated
The first and most obvious point is that running two separate departments with their own systems is a massive waste of time and money. And it’s been that way for decades.
As the Institute of Economic Affairs (IEA) pointed out last year: “It’s costly to administer.
“In the early days, NI payers were a distinct group from Income Tax payers... so different systems made sense.
“Today, most workers pay both imposts: net pay and the Government’s total take is what counts. A unified system would be cheaper to run.
“On grounds of transparency, then, merger is sensible. It would create cost savings for employers and Government. “
2. It’s dishonest
We would argue that it's misleading on two fronts.
First, it gives the false impression that our tax on earnings is far lower than it really is.
Second, it’s not really a National Insurance anymore as it can no longer pay for the cost of all the benefits it was created to cover on its own.
“It misleads the public, who still seem to imagine State Pensions are paid from a fund accumulated from past contributions,” says the IEA.
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3. The obstacles aren't insurmountable
We recognise that merging the two would be a huge project, and as such it would kick up a raft of issues.
One of the very first issues that is brought up is that of pensioners, who do pay Income Tax, but don’t pay NI. So would forcing them to pay a higher rate not be massively unfair?
Well, this could be skirted around by introducing a reduced combined tax rate for those in retirement.
There are a other issues to resolve too, but none so great that remaining in the current two-tier system is the better option.
You could argue that the biggest obstacle are the politicians themselves. By being more transparent, politicians would have to lay bare the true rate of tax they impose on us.
That would be a hugely risky move, and few political parties would be willing to risk losing votes even if it means improving the system overall.
Let’s hope that whoever does win on 8 June sees the benefit of doing so. The rest of us certainly will.
Do you agree that NI and Income Tax should be merged? Would you vote for a party that promised to do this? Vote in our poll below and let us know your thoughts in the comments section.
Read more pledges from our manifesto:
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Comments
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Here's a thought, employees and employers both pay NI. So when a business employs someone, effectively they are paying a tax for the privilege of hiring that person. Perhaps merging employees' tax with NI tax while at the same time scrapping employers' NI and making up the shortfall through corporation tax MIGHT encourage businesses to take on more staff. Not agency workers or contractors with all their IR35 baggage, but actual permanent staff. At the same time there would be cost efficiencies in the collection process by losing both lots of NI tax, and simply collecting additional revenue through streams which already exist. Frankly it makes no difference to me if my salary slip says "Income tax £200, NI £100" or just "Tax £300."
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Even when it was set up Bevan said "the big secret is that there is no fund". NI was set up to pay for in work benefits and state pensions. It still does so today. Very little of NI goes to the NHS which is generally funded out of general taxation. Effectively NI is a tax, like the TV licence. Reform could be gradual by bringing thresholds between Tax and NI into line and removing obvious anomalies like the marginal rate rising then falling and then rising again. But beware, whenever things are simplified there will be winners and losers. We all like to be in the former group, and hate being in the latter group.
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Unfortunately, Pauline 40, politicians have never been held accountable for anything. I am a pensioner who used to be an accountant and therefore realise that the N.I and Income Tax are a big con keeping MPs in a lifestyle to which they become accustomed and being given out to anyone in the world who makes a case for economic inefficiencies. The fact the successive Governments have wasted the resources they have been provided with - in my case for 52 years from the age of 14 - is apparently beside the point to people in Westminster who refuse to take responsibility for any thing We are led to believe our system for running the country is a good one but that is only when compared to others who have the rule of the despot.
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06 June 2017