In the summer budget last year, George Osborne asked the Office for Tax Simplification to study the possible alignment of national insurance with income tax. On Monday last week they published their report, recommending that the Chancellor shifts employee national insurance contributions to make it much more like income tax:
- An annual, cumulative, aggregated basis, instead of weekly and per-job
- Replace employer national insurance with a flat-rate payroll tax
- Align rules on benefits in kind, earnings definitions and procedures
- Increase transparency with a view to an ultimate full merger or even closer alignment
This is great news. Most of the recommendations were made by the TaxPayers' Alliance in previous reports Abolish National Insurance, The Single Income Tax and How to abolish National Insurance, not to mention our long and vocal campaigning.
The main departure from our recommendations was the proposal to replace employer national insurance with a flat-rate payroll tax. Instead, we proposed that the charge should be merged into income tax and employers should increase wages accordingly, to bring full transparency to its economic effect. A big problem with the tax system is the disconnect between the real, economic incidence of taxation and the legal incidence of the transactions. Employers may transact the sums, but it is wages which are reduced, not profits. A payroll tax would do nothing to honestly address the fact that employees bear the burden of labour taxes.
While this is a missed opportunity for enhancing transparency, the payroll tax option does at least have the advantage of being very simple and straightforward and has been recommended by many, including David Martin in 2010 in a report for the Centre for Policy Studies.
At his budget tomorrow, the chancellor must take up the mantle laid down by the OTS and finally get to work on these first steps towards abolishing national insurance.