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PAYE/NIC merger: whatever floats your boat?

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A potential manifesto commitment to merge income tax and national insurance was floated [the other week] and torpedoed by lunchtime [the same day] by No 10. What’s going on?

PAYE and NICs are both government revenue sources, but with different rules. It seems mad to run two separate regimes, so merging the two sounds a sensible simplification. Until you think about it…

The rules are different for good reason. When NICs were invented, they were a flat-rate stamp on a card that bought a flat-rate benefit. If you paid for enough weeks in a year, the year qualified you for sickness, unemployment and pension benefits. If you qualified for enough years, you got a full state pension in old age. Only the flat-rate part of that has changed, and the earnings-related money is now collected through payroll.

NICs have a long-term effect, unlike the annual income tax, most of which is collected problem-free through PAYE. The basis for NICs lies in the social security benefits legislation, not the contributions rules. To merge these ‘taxes’, you’d need to rewrite all the contributory benefit rules. Coming on top of the recasting of the state pension to flat rate in 2016, and the snail’s pace introduction of universal credit, this would be a huge project for HMRC and DWP, taking more than one parliament and affecting every contributor below state pension age. You’d need transitional rules for many years – three (big) sets of rules, not two. And you’d have to split employee NICs and employer NICs into two separate taxes – four sets of rules, not three. And renegotiate a number of international treaties. And resource HMRC and DWP to handle the changeover, involving yet another massive IT project.

And for what? A little simplification. Most PAYE and NICs have to be worked out by computer due to RTI, so most of the hard work isn’t really hard. And every employee can see on their payslip how much tax and NICs have been deducted – you don’t need a merger for that.

The hapless backbencher who was asked to run up the merger flag to see if anyone saluted clearly knew nothing about the four or more committees over the last 30 years that had looked in depth at this and rejected it. It’s amazing it took until lunchtime for the boat to be scuttled by No 10.