Published by Malcolm McLean on
• NI is already for all intents and purposes a tax on earned income – effectively a payroll tax
• Although NI contributions are used to determine entitlement to the basic state pension there is no fund as such and payments are provided for on a “pay as you go” basis
• A similar arrangement applies with other welfare contributory benefits
• NI is in part deemed to be a contribution to the NHS which is otherwise financed from general taxation
• Merging tax and NI offers the scope for substantial savings on administration costs for both employers and the central bureaucracy
• The retention of detailed records of millions of individual NI records would be superfluous
• The interfaces between HMRC and DWP would be simplified
• There would be savings on IT costs in the longer term
• It would make fully transparent to workers how much they were contributing to government coffers
• The basic tax rate could be perceived to be increasing from 20% to 32%
• Pensioners who do not currently pay NI would face a massive hike in their tax demands
• It would be the end of the “contributory principle” and alternative ways of establishing entitlement to the state pension and other benefits would have to be found
• Politically it might not be acceptable
• It would create possibly hundreds if not thousands of civil service redundancies in the North East where unemployment is already unacceptably high
• It would require the merger of two completely separate computer systems
There appears to be no over-riding operational reason why such a merger should not go ahead. The reasons why it has not happened previously are probably more political than anything. There are certainly a few obstacles to overcome and any changes may have to be phased in over the longer-term and not immediately.
Clearly a 12% increase in tax for pensioners could not be contemplated but a corresponding increase in their personal tax allowances could be introduced to effectively maintain the status quo. Alternatively, lower rate of tax could be made in relation to pensioners income and in connection with other areas which are not currently subject to NI contributions (e.g. savings income, dividends and capital gains).
I doubt that ending of the contributory principle would be seen as that much of a loss. This might hasten the development of the Citizen’s Pension, i.e. a state pension based on a residency test not on NI contributions, with other short term welfare benefits such as Incapacity Benefit and Contributory Job Seekers Allowance related to a recent record of earnings ( as Maternity Benefit is) and not contributions.
Other factors such as redundancies etc are a consequence of a much simpler, stream lined system and maybe the government will see them as a price worth paying for the substantial savings on administration costs that will result.