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Question for Treasury

UIN 143064, tabled on 25 January 2021

To ask the Chancellor of the Exchequer, if he will make an assessment of the potential merits of combining Income Tax and National Insurance contributions into an Income, Health and Pension Tax with health and pension provision paid until retirement or 65-67 years of age on all earned income (a) with no tax or health and pension until a minimum level of income is achieved, (b) at a basic rate and (c) at a reasonable higher rate.

Answered on

28 January 2021

This would be a significant change, as NICs and Income Tax work quite differently at present.

NICs are charged on earnings on a per-employment, per-pay period basis, whereas Income Tax is an annual tax, and takes into account an individual’s total, cumulative earnings over the year. NICs also come with specific benefits e.g. State Pension, Jobseeker’s Allowance (JSA), Maternity Allowance, and Bereavement benefits. This is in line with NICs’ role as a social security scheme, into which contributions are made from people’s earnings while in work to support them when they are out of work. NICs are currently not payable by those over State Pension age. As such, amalgamating NICs into, or even bringing them closer into line with, income tax would come with major transitional costs and issues.

In the past, governments have considered the case for amalgamating or better aligning income tax and NICs to make the system simpler for individuals and businesses. Most recently, the Office of Tax Simplification (OTS) considered this in 2016 in its report on ‘Closer alignment of Income Tax and National Insurance’.

The OTS analysis shows there are a range of challenges that would need to be taken into consideration before proceeding with such a radical reform. For example, it is estimated that 7.1 million would pay less NICs but 6.3 million would pay more NICs (some of whom would gain contributory benefits).

Answered by

Treasury
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