The Office of Tax Simplification (OTS) has published its second report on the closer alignment of NICs with income tax. This focuses on the two key recommendations from its March report, namely: calculating employee NICs on a cumulative basis similar to PAYE; and moving employer NICs to a payroll levy. The report finds the proposals would affect around 40% of employees, with 5.5m people paying more NICs and 7.6m people paying less.
The first report in March outlined a seven stage programme for achieving a simplified system. The current income tax and NICs rules were not designed for modern working patterns, with a growing number of people working in self-employment, multi-jobs and freelancing. This latest report provides more detail on the specific impacts of the employee and employer NICs changes and the policy challenges they will pose, highlighting the need for an informed public debate on the issues.
The key points of the employee NICs proposal include:
The OTS has published a separate design options paper for the NICs code, setting out in detail how this might work. Its preferred option is for a code which replicates the function of the PAYE code, but with a format sufficiently different to avoid the two being confused.
The report says employers do not expect to see the move creating significant additional costs, due to the streamlining effects, although a key requirement is that software changes to cope with the changes would need a two-year lead time. There will, however, be an impact on HMRC, which will have to make major system changes.
The employer NICs proposal includes:
The report suggests that reform will offer modest administrative savings for larger employers, mainly because of the scope for combining or working in parallel with the new apprenticeship levy. Colin Ben-Nathan, chairman of CIOT’s employment taxes sub-committee, commented: ‘We think that the proposal to move employer NICs to a payroll levy based on total payroll costs is sensible. The OTS has produced some interesting analysis as to how this might be done, looking at the trade off between the rate of the levy and the amount of employment allowance that may be available to each employer.’
The OTS does not see a single, clear cut solution, as each option has significant impacts. The report stresses that the government should now explore the wider impact of different options and choices. The OTS is at pains to point out that ‘we do not underestimate or seek to diminish the amount of work that will be needed to effect the changes we propose, nor their impact’. Nevertheless, the report concludes: ‘Nothing in the further work that we have carried out alters the overall conclusions in our March report: there is a need and an opportunity to reform the NICs system.’
The OTS believes its overall seven stage closer-alignment plan is realistic and has proposed a five year timetable, between 2017 and 2022. The stages are:
See here.
The CIOT has welcomed the report, with its objective of reforming the NICs system to make it ‘fit for the future’. Ben-Nathan said: ‘Having two different systems charging tax on essentially the same income leads to duplication, complication and additional cost all round.’ However, he added: ‘Careful thought will need to be given to the transition, particularly to the effect on the lower paid. One approach may be for the government to raise the primary threshold for employee NICs closer to the level of the income tax personal allowance, so that the lower paid are properly protected. Such a move will have to be judged against a potential cost to the exchequer.’
The Office of Tax Simplification (OTS) has published its second report on the closer alignment of NICs with income tax. This focuses on the two key recommendations from its March report, namely: calculating employee NICs on a cumulative basis similar to PAYE; and moving employer NICs to a payroll levy. The report finds the proposals would affect around 40% of employees, with 5.5m people paying more NICs and 7.6m people paying less.
The first report in March outlined a seven stage programme for achieving a simplified system. The current income tax and NICs rules were not designed for modern working patterns, with a growing number of people working in self-employment, multi-jobs and freelancing. This latest report provides more detail on the specific impacts of the employee and employer NICs changes and the policy challenges they will pose, highlighting the need for an informed public debate on the issues.
The key points of the employee NICs proposal include:
The OTS has published a separate design options paper for the NICs code, setting out in detail how this might work. Its preferred option is for a code which replicates the function of the PAYE code, but with a format sufficiently different to avoid the two being confused.
The report says employers do not expect to see the move creating significant additional costs, due to the streamlining effects, although a key requirement is that software changes to cope with the changes would need a two-year lead time. There will, however, be an impact on HMRC, which will have to make major system changes.
The employer NICs proposal includes:
The report suggests that reform will offer modest administrative savings for larger employers, mainly because of the scope for combining or working in parallel with the new apprenticeship levy. Colin Ben-Nathan, chairman of CIOT’s employment taxes sub-committee, commented: ‘We think that the proposal to move employer NICs to a payroll levy based on total payroll costs is sensible. The OTS has produced some interesting analysis as to how this might be done, looking at the trade off between the rate of the levy and the amount of employment allowance that may be available to each employer.’
The OTS does not see a single, clear cut solution, as each option has significant impacts. The report stresses that the government should now explore the wider impact of different options and choices. The OTS is at pains to point out that ‘we do not underestimate or seek to diminish the amount of work that will be needed to effect the changes we propose, nor their impact’. Nevertheless, the report concludes: ‘Nothing in the further work that we have carried out alters the overall conclusions in our March report: there is a need and an opportunity to reform the NICs system.’
The OTS believes its overall seven stage closer-alignment plan is realistic and has proposed a five year timetable, between 2017 and 2022. The stages are:
See here.
The CIOT has welcomed the report, with its objective of reforming the NICs system to make it ‘fit for the future’. Ben-Nathan said: ‘Having two different systems charging tax on essentially the same income leads to duplication, complication and additional cost all round.’ However, he added: ‘Careful thought will need to be given to the transition, particularly to the effect on the lower paid. One approach may be for the government to raise the primary threshold for employee NICs closer to the level of the income tax personal allowance, so that the lower paid are properly protected. Such a move will have to be judged against a potential cost to the exchequer.’
