Comment: A long and arduous road to tax integration

Alex Henderson is a partner in PwC's Tax practice
Alex Henderson is a partner in PwC's Tax practice

A potentially radical change could be on the way.

By Alex Henderson

The 2011 Budget did not contain much by way of surprises, but the chancellor's announcement that he intends to consult on the integration of income tax and national insurance contributions (NIC) heralds a potentially radical change.

In its small business tax review, the government's Office of Tax Simplification recommended that the government consider integration of the two. Now it would appear that the chancellor has concrete intentions to make some progress on this issue.

In the Budget, the chancellor made it clear that he already foresaw problems with a simple amalgamation of income tax and NIC, and indicated any change would not happen quickly. But those pressing for reform in this area will have taken heart from his announcement.

While the integration of these two regimes makes a great deal of sense from an administrative perspective, and would do much to simplify the tax system for the majority of taxpayers, the complexities and issues that will have to be addressed should not be underestimated. These will include how the proposed integration will affect pensioners, the self-employed and those entering and leaving the UK.

Pensioners, for example, are not liable for NICs but are still subject to income tax. In order to transition to any new system the chancellor would have to either reduce the rate of income tax and NICs or increase access to benefits so that there were largely winners from any changes made.

So there are further issues with the potential reduction of revenue to the exchequer and the initial costs of any integration. The current economic climate makes this seem unfeasible, certainly in the short term while the government works to balance the public finances.

The chancellor will also have to consider the fact that if he goes ahead with integration the UK will have a new far higher headline rate of income tax.

While taxpayers will not actually be paying any more tax, as the rise will simply be the NICs rate added to the income tax rate, the presentation of this new headline rate internationally will have to be managed carefully, as there is a danger that the UK could slip down international competitiveness rankings. So the timeframe of a number of years for any merger to be completed seems sensible.

In the shorter term, however, there's plenty of scope for aligning the bases of the calculation of the two 'taxes' and it seems likely now that this will happen.

Some taxpayers already notice the incidence of the tax that they pay far more than others. For example, small business owners and the self-employed, who do not have their tax and contributions deducted at source, have to write a cheque to the Treasury twice a year. With the rate of employers' and employees' NICs rising from April the top will have an effective 'tax' rate of 65.8% of NIC and income tax: a substantial and significant cost to any business. By raising the debate on the integration of the two 'taxes' the chancellor has highlighted the real rate of 'tax' on income.

Ultimately, the glittering prize for the chancellor is a simplified tax system which assists with rebalancing the economy and potentially reduces the tax burden on businesses and individuals; but the road to integration is a long and arduous one.

However, if the chancellor can succeed in nudging commentators and taxpayers into the habit of referring to income tax and NICs as one and the same thing, then he will perhaps have laid the groundwork towards a Nigel Lawson-style reforming Budget in the future - possibly in the next parliament.

Alex Henderson is a partner in PwC's Tax practice

The opinions in's Speakers Corner are those of the author and are no reflection of the views of the website or its owners.


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