Making NICs simpler – what OTS recommends

In a nutshell

The simplest approach to the NICs system would be one that runs in the same way as PAYE does for Income Tax.

That would enable an individual’s total employment income in the year to be taken into account in calculating their annual NICs liability, rather than each weekly or monthly earnings period from each employer being considered in isolation.

What we’ve got today with NICs and Income Tax

Currently, there are two complex regimes tax similar earnings of employees with some distortionary outcomes, and the self-employed face their own differences; while the administrative and legislative links between the two taxes creak.

What’s proposed (i)

A structure for employee NICs that mirrors Income Tax and a payroll based charge in place of employers’ NICs.

Some may pay more, others less. Clarity about who they are, the implications and acceptance that change is necessary. Uniform treatment for expenses and benefits in kind across both taxes.

What’s proposed (ii)

Instant simplification steps including:

Align definitions and other differences in the taxation of employee earnings.

Establish a legislative process to secure convergence.

Upgrade HMRC guidance and handling in one place for taxpayers

The result of (i) + (ii)

• Two taxes fit for future working patterns that are simplified so employees are taxed in the same way for both taxes on the same earnings and employers pay a payroll based charge
• Few differences between the treatment of the employed and self-employed;
• A fully joined up approach to the two taxes across policy and administration,
• Clarity for individuals and reduced administrative burdens for businesses and HMRC

Editor’s Note: Article based on extracts from the Office of Tax Simplification’s new report, Closer alignment of income tax and national insurance: a further review.