The Government has asked the Office of Tax Simplification to investigate 'closer alignment' of income tax and National Insurance. It could result in a single new tax which would probably apply only to earnings.
The task will be difficult and there will be winners and losers. Here is a brief summary of the main differences between the two taxes.
- NI is due only on earnings; income tax is due on all income including pensions, rental income, savings interest, and dividends.
- NI is calculated on weekly earnings; income tax is calculated on annual income
- NI is not charged under age 16 or above state pension age; income tax is due at all ages
- NI starts on earnings of £155 a week (£8060 per year); income tax begins above £10,600 per year but that threshold vanishes as income rises from £100,000 to £121,200 a year.
- NI for employees is 12% up to £815 per week (£42,385 a year); income tax for all is 20% up to £42,385 a year.
- NI for self employed is £2.80 a week (if profits exceed £5965) plus 9% of profits between £8060 to £42,385 a year. income tax for self-employed is at same rates and bands as for everyone.
- NI falls to 2% on earnings/profits (employees and self-employed) above £815 per week (£42,385 a year); income tax rises to 40% above £42,385 and 45% above £150,000
- NI of 13.8% is also paid by employers on the earnings of their employees above £155 a week; income tax is only paid by individuals.
- NI does not apply to savings interest and dividends; Income tax now has separate rules and thresholds for savings interest and dividends.
- NI is not charged on some payments made to employees; income tax is charged on all payments made to employees including benefits in kind.
These differences mean that the calculation and collection of NI and income tax are very different. Employers have to collect both separately though at the same time through PAYE. Income other than earnings is taxed in different
National Insurance is paid into the National Insurance Fund - basically a Treasury accounting exercise - and the proceeds are used only to pay state pension, a few other benefits and work related payments and a percentage is paid to the NHS.
Income tax all goes to the Treasury and is used as the Government chooses.
Paying National Insurance contributions gives individuals entitlement to state pension and a few other benefits such as the non-contributory Jobseeker's Allowance and Employment and Support Allowance.
In the last twelve months income tax brought in £142.1 billion (32.0% of receipts), NI brought in £111.5bn (21.4% of receipts).
22 July 2015