Employers and tax and payroll professionals were invited to help the government explore options for the operational alignment of income tax and national insurance contributions, after a recent call for evidence drew more than 70 responses and suggested a ‘clear appetite’ for reform.
The government accepted that there could be winners and losers even in the absence of a full merger of tax and NICs, and said it would ensure it had a ‘clear understanding’ of the impact on individuals before proceeding with any reform.
Launching the government’s ‘vision for simpler personal taxes’ at the same time, David Gauke, the Exchequer Secretary to the Treasury, declared that personal online tax accounts and pre-filled tax returns could help ‘transform the customer experience of the personal tax system’ and improve people’s understanding of what they pay.
Responses to the recent call for evidence suggested a ‘clear appetite for reform’ short of a complete merger of tax and NICs, the government said in Integrating the operation of income tax and National Insurance contributions: Next steps.
In March, the Office for Tax Simplification suggested in its interim report on small business tax that the integration of income tax and NICs, and clarification of the boundary between employment and self-employment, were key areas for structural reform.
Without structural changes to the system of tax and NICs, issues underlying IR35 would ‘continue to exist’ and the IR35 rules would continue to place burdens on taxpayers and HMRC, the OTS said.
But at Budget 2011 the government said it believed that integrating the operation of income tax and NICs could remove distortions, reduce burdens on business and improve fairness. The government would maintain the contributory principle and would not extend NICs to individuals above state pension age or to other forms of income such as pensions, savings and dividends.
The government will now work with external stakeholders to identify ways to integrate the operation of income tax and NICs, and will report on progress at Budget 2012.
‘It is right that we maintain a NICs system separate from income tax,’ Gauke told a Downing Street press conference on 14 November. ‘We believe the contributory principle is still right, but there is still much that we can do to simplify both systems.’
During a panel discussion John Whiting, Tax Policy Director at the CIOT and Tax Director of the OTS, confessed to ‘some personal disappointment’ over the contributory principle. ‘I do wonder if it is still needed,’ he said.
Gauke said that if the government could address the operational issues, ‘a lot of the arguments that are made to abolish NICs could actually be addressed in other ways’.
The Treasury’s paper acknowledges that the implications of any change for individual earners represent a key challenge. Some people could pay more and others less: ‘Before proceeding with any reform, the government will ensure it has a clear understanding of the number of individuals likely to be affected and how they will be affected.’
At present, people whose earnings fluctuate over the year, and those with multiple employments, may pay different amounts to those who do not. ‘Reforming the assessment basis of NICs provides an opportunity to consider whether employees who earn the same amount can pay the same contributions,’ it said.
The government recognised that the self-employed pay less than those in employment, reflecting the fact that the self-employed are eligible for fewer contributory benefits. But the ‘primary focus’ of this work would be an ‘operational integration’.
However, greater integration may be able to improve ‘the fairness of outcomes’, the Treasury said, by making it more likely that employees with similar circumstances pay similar amounts and gain similar contributory benefit entitlements.
Comparison of income tax and NICs paid by employees
|
|
Income tax |
Employee NICs |
|
Who pays? |
No age limit |
16 to state pension age |
|
What is it paid on? |
On all income including earnings, pensions and income from savings or investments and benefits in kind. |
On most earnings from employment, but not on most benefits in kind. |
|
Period of assessment |
Assessed on total annual income. Deductions by employers through PAYE are based on pay to date (cumulative). Liability finalised following the end of the tax year. |
Assessed on earnings in each earnings period (non-cumulative). Liability finalised at the point that the earnings are paid. |
|
Liability across employments |
Earnings from separate employments aggregated. |
NICs liability calculated on each employment in isolation (non-aggregated). |
|
Structure of charge |
Above the personal allowance, tax is applied at three rates (rising as income rises) on different bands of income. |
Applied at two main rates on different bands of earnings above the primary threshold with the rate for the higher band lower than that for the lower band. |
|
Entitlements provided |
No entitlements. |
Entitlement to contributory benefits, including the State Pension, and statutory payments. |
Source: HMRC / HM Treasury
The PAYE system ‘does not place much by way of demands of time on taxpayers, but it can also be remote and confusing’, Gauke said in a foreword to HMRC’ discussion paper Modernising the Administration of the Personal Tax System: Tax Transparency for Individuals.
‘Know what you pay’ summed up the objective of the government’s vision on personal tax transparency, he told journalists.
Income tax rates had fallen over recent decades while NIC rates had increased, he said, with the result that overall the proportion of income taken in tax and NICs had remained ‘largely flat’.
But taxpayers should have a better understanding of the percentage of gross pay that is paid in each tax month.
Gauke added: ‘It has been said before that it is the “detachment” that underpins the system. Jean-Baptiste Colbert, the French finance minister under Louis XIV, said: “The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing”.
‘Now I’m not saying that our aim today is an increased amount of hissing, but it is right that the goose is at least aware of the number of feathers being plucked.’
John Whiting observed later that tax is often said to be the price we pay for living in a civilised society. ‘Clearly people should appreciate just how civilised we are and, therefore, just how much tax they pay,’ he said.
‘Real Time Information’ would bring PAYE into the 21stcentury and make tax more accurate, Gauke said, and was ‘on track’ to have all employers and pension providers using it by October 2013.
RTI would enable HMRC to provide employers with a snapshot of their PAYE balance via an online ‘employer dashboard’.
Employers would find their PAYE position ‘easy to see and easy to fix’. Draft amendments to PAYE regulations, in readiness for the RTI pilot, were published on 14 November.
HMRC‘s discussion paper noted that while RTI will make PAYE more accurate, ‘PAYE will still be a largely opaque system which attempts to get tax right in-year with little taxpayer involvement’.
‘It is the government’s ambition to increase the visibility of how much tax individual customers pays, or should pay,’ HMRC said.
‘The government believes that this will make it easier for taxpayers to understand what they need to do to comply with their obligations; understand what they should do if they think their tax is not right; understand what HMRC’s role is in the tax calculation; encourage individuals to take greater responsibility for their own tax affairs; and be more aware of why tax is paid, how it supports society and public services.’
HMRC will explore options including online accounts for individual PAYE taxpayers; pre-filled tax returns; pre-filled tax statements; and ‘education/improving the customer experience’.
‘In the UK, individuals who pay their tax via PAYE have no access to their tax records online. This contrasts with those individuals who have to file a self assessment (SA) return who are able to check their tax position through their SA online account.
‘The government would like to receive views on whether UK taxpayers feel such access would be effective in increasing their tax understanding,’ HMRC said.
Pre-filling of information in returns is ‘widely used’ by tax authorities in other countries to reduce the burden on individuals, HMRC noted.
‘The tax authorities do not require individuals to fill in information about income that the authority is able to obtain directly from the source.’
HMRC invited comments by 24 February 2012 on ‘what taxpayers know about the tax they pay; what areas of the personal tax system create the most difficulty; how technology can help them better access and understand their tax position; and how HMRC can engage with individual taxpayers in hearing their views on how the tax system could be modernised’.
Employers and tax and payroll professionals were invited to help the government explore options for the operational alignment of income tax and national insurance contributions, after a recent call for evidence drew more than 70 responses and suggested a ‘clear appetite’ for reform.
The government accepted that there could be winners and losers even in the absence of a full merger of tax and NICs, and said it would ensure it had a ‘clear understanding’ of the impact on individuals before proceeding with any reform.
Launching the government’s ‘vision for simpler personal taxes’ at the same time, David Gauke, the Exchequer Secretary to the Treasury, declared that personal online tax accounts and pre-filled tax returns could help ‘transform the customer experience of the personal tax system’ and improve people’s understanding of what they pay.
Responses to the recent call for evidence suggested a ‘clear appetite for reform’ short of a complete merger of tax and NICs, the government said in Integrating the operation of income tax and National Insurance contributions: Next steps.
In March, the Office for Tax Simplification suggested in its interim report on small business tax that the integration of income tax and NICs, and clarification of the boundary between employment and self-employment, were key areas for structural reform.
Without structural changes to the system of tax and NICs, issues underlying IR35 would ‘continue to exist’ and the IR35 rules would continue to place burdens on taxpayers and HMRC, the OTS said.
But at Budget 2011 the government said it believed that integrating the operation of income tax and NICs could remove distortions, reduce burdens on business and improve fairness. The government would maintain the contributory principle and would not extend NICs to individuals above state pension age or to other forms of income such as pensions, savings and dividends.
The government will now work with external stakeholders to identify ways to integrate the operation of income tax and NICs, and will report on progress at Budget 2012.
‘It is right that we maintain a NICs system separate from income tax,’ Gauke told a Downing Street press conference on 14 November. ‘We believe the contributory principle is still right, but there is still much that we can do to simplify both systems.’
During a panel discussion John Whiting, Tax Policy Director at the CIOT and Tax Director of the OTS, confessed to ‘some personal disappointment’ over the contributory principle. ‘I do wonder if it is still needed,’ he said.
Gauke said that if the government could address the operational issues, ‘a lot of the arguments that are made to abolish NICs could actually be addressed in other ways’.
The Treasury’s paper acknowledges that the implications of any change for individual earners represent a key challenge. Some people could pay more and others less: ‘Before proceeding with any reform, the government will ensure it has a clear understanding of the number of individuals likely to be affected and how they will be affected.’
At present, people whose earnings fluctuate over the year, and those with multiple employments, may pay different amounts to those who do not. ‘Reforming the assessment basis of NICs provides an opportunity to consider whether employees who earn the same amount can pay the same contributions,’ it said.
The government recognised that the self-employed pay less than those in employment, reflecting the fact that the self-employed are eligible for fewer contributory benefits. But the ‘primary focus’ of this work would be an ‘operational integration’.
However, greater integration may be able to improve ‘the fairness of outcomes’, the Treasury said, by making it more likely that employees with similar circumstances pay similar amounts and gain similar contributory benefit entitlements.
Comparison of income tax and NICs paid by employees
|
|
Income tax |
Employee NICs |
|
Who pays? |
No age limit |
16 to state pension age |
|
What is it paid on? |
On all income including earnings, pensions and income from savings or investments and benefits in kind. |
On most earnings from employment, but not on most benefits in kind. |
|
Period of assessment |
Assessed on total annual income. Deductions by employers through PAYE are based on pay to date (cumulative). Liability finalised following the end of the tax year. |
Assessed on earnings in each earnings period (non-cumulative). Liability finalised at the point that the earnings are paid. |
|
Liability across employments |
Earnings from separate employments aggregated. |
NICs liability calculated on each employment in isolation (non-aggregated). |
|
Structure of charge |
Above the personal allowance, tax is applied at three rates (rising as income rises) on different bands of income. |
Applied at two main rates on different bands of earnings above the primary threshold with the rate for the higher band lower than that for the lower band. |
|
Entitlements provided |
No entitlements. |
Entitlement to contributory benefits, including the State Pension, and statutory payments. |
Source: HMRC / HM Treasury
The PAYE system ‘does not place much by way of demands of time on taxpayers, but it can also be remote and confusing’, Gauke said in a foreword to HMRC’ discussion paper Modernising the Administration of the Personal Tax System: Tax Transparency for Individuals.
‘Know what you pay’ summed up the objective of the government’s vision on personal tax transparency, he told journalists.
Income tax rates had fallen over recent decades while NIC rates had increased, he said, with the result that overall the proportion of income taken in tax and NICs had remained ‘largely flat’.
But taxpayers should have a better understanding of the percentage of gross pay that is paid in each tax month.
Gauke added: ‘It has been said before that it is the “detachment” that underpins the system. Jean-Baptiste Colbert, the French finance minister under Louis XIV, said: “The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing”.
‘Now I’m not saying that our aim today is an increased amount of hissing, but it is right that the goose is at least aware of the number of feathers being plucked.’
John Whiting observed later that tax is often said to be the price we pay for living in a civilised society. ‘Clearly people should appreciate just how civilised we are and, therefore, just how much tax they pay,’ he said.
‘Real Time Information’ would bring PAYE into the 21stcentury and make tax more accurate, Gauke said, and was ‘on track’ to have all employers and pension providers using it by October 2013.
RTI would enable HMRC to provide employers with a snapshot of their PAYE balance via an online ‘employer dashboard’.
Employers would find their PAYE position ‘easy to see and easy to fix’. Draft amendments to PAYE regulations, in readiness for the RTI pilot, were published on 14 November.
HMRC‘s discussion paper noted that while RTI will make PAYE more accurate, ‘PAYE will still be a largely opaque system which attempts to get tax right in-year with little taxpayer involvement’.
‘It is the government’s ambition to increase the visibility of how much tax individual customers pays, or should pay,’ HMRC said.
‘The government believes that this will make it easier for taxpayers to understand what they need to do to comply with their obligations; understand what they should do if they think their tax is not right; understand what HMRC’s role is in the tax calculation; encourage individuals to take greater responsibility for their own tax affairs; and be more aware of why tax is paid, how it supports society and public services.’
HMRC will explore options including online accounts for individual PAYE taxpayers; pre-filled tax returns; pre-filled tax statements; and ‘education/improving the customer experience’.
‘In the UK, individuals who pay their tax via PAYE have no access to their tax records online. This contrasts with those individuals who have to file a self assessment (SA) return who are able to check their tax position through their SA online account.
‘The government would like to receive views on whether UK taxpayers feel such access would be effective in increasing their tax understanding,’ HMRC said.
Pre-filling of information in returns is ‘widely used’ by tax authorities in other countries to reduce the burden on individuals, HMRC noted.
‘The tax authorities do not require individuals to fill in information about income that the authority is able to obtain directly from the source.’
HMRC invited comments by 24 February 2012 on ‘what taxpayers know about the tax they pay; what areas of the personal tax system create the most difficulty; how technology can help them better access and understand their tax position; and how HMRC can engage with individual taxpayers in hearing their views on how the tax system could be modernised’.
