Warning over NI merger plans

George Osborne’s reform of taxation could create new system of winners and losers, tax experts warn Government plans to merge national insurance and income tax expected in this week’s budget could be “politically explosive” and create a new system of winners and losers, tax experts have warned. The chancellor, George Osborne, will signal his intention to reform the two taxes as part of a drive to simplify taxation for business by reducing bureaucracy and cutting costs when he unveils his budget for growth on Wednesday. Reform will be trumpeted by Osborne as a way for people to see more clearly how much they are being taxed. Mike Warburton, tax director at Grant Thornton, the accountancy firm, said: “The plan is a good one in principle as it can’t be right that people’s earnings are subjected to two different taxes. But the issue is politically charged because an amalgamation of the two taxes would mean basic rate taxpayers would see their income tax jump from the current rate of 20% to 32%, to take account of the 12% NI rate that comes into force on 5 April. Psychologically, that could be difficult to swallow, so changes would have to be very carefully explained.” Higher rate taxpayers would see their rate jump from 40% to 52%. Over the years, Conservative and Labour governments have increased national insurance to avoid being accused of raising personal taxes. Warburton said the reality was “there is no separate national insurance pot that goes towards paying unemployment benefits or the state pension; NI is all part of general taxation”. He said that merging income tax and NI could create winners, such as stay-at-home mothers, whose state pension would no longer be linked to how much NI they pay. But losers could be pensioners or individuals who do not work, whose savings would be taxed at a new, higher rate of income tax. It could also hit people who pay the full amount into their pension over their working lives, as they would no longer qualify for an “enhanced’ state pension. Trade unions have warned that tax shakeups for workers must be carefully scrutinised as reform could be used as a way to increase tax receipts. Chris Sanger, head of tax policy at Ernst & Young, said reforming the system could be “politically sensitive” as employee taxation would be more visible and people would have a clearer idea of their tax bill. But he supported the idea as it would cut costs and paperwork for businesses. “It is pointless to have two separate employee taxes with two different sets of rules and regulations. Many millions of pounds could be saved and the government are absolutely right to look into it.” Sanger said employer NI contributions could be scrapped and replaced by an additional payroll tax. Experts point out there is no way that employer NI could be scaled down as the ration of pensioners to people of working age is forecast to jump from 25% to 43% over the next three decades. In a report on small business tax commissioned by the chancellor last July, the Office of Tax Simplification called for an end to the parallel systems of NI and income tax. “The overwhelming conclusion is that genuine and long-lasting simplification can only be brought about through structural change to the entire UK tax system,” the report said. Income tax George Osborne Budget National insurance Tax Richard Wachman guardian.co.uk

Posted by on March 20, 2011. Filed under News, Politics, World News. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.