Merging NI and income tax

jackstarb you are correct; marginal rates at 100k are high although not for long. If you plot the figures I gave you get a bump in the graph. This is a consequence of tweaking a system and being too scared of changing headline figures - easier to say reduce personal allowance than increase tax rates. Both parties are guilty of this.

It is still a lower marginal rate than people face coming off benefits / tax credits though.

From a clean slate it would be easy to ensure this sort of anomaly wasn't there.

as for the purpose of tax - of course it is for raising income (what else?) and of course it should be done in a fair way. I am very glad to live in a society that pays benefits to those who need them - lots of people on this thread agree that a universal credit is a good idea. So "redistribution" is one of the things that the income is spent on.

Yes, it's those types of distortions which make everything very hard and how to wipe them out. The same thing applies to those who don't work at all and start to. It's not easy but a basic simplifcation of merging tax and NI or even radically abolishing employee and employer NI which would be simpler and not result in tax rates for those over 65 in work who don't pay NI and those living on investment income who just pay income tax not NI would be purer.

I personally am currently choosing not to increase my hours - a significant consideration in that choice was the effective 73% deduction rate I would suffer on any additional income from April 11.
There are other considerations, which mainly relate to being there when my children are not in school.
I don't need that extra 27%, so I'm not increasing my hours. There would be a point at which that decision would reverse, I'm not sure where it is for me, probably around 50%.
And if each extra £ in my pocket would make a real difference to my life I would be working extra despite the 73% rate.

Chil, I so agree. I'm starting to wonder why I went out to work after the dcs were born. If I'd been an SAHM, DH's income would be similar, we would qualify for a schoolfees bursary and family tax credit. There is SO a middle-income trap.

They certanily aren't radical enough - all we had to choose from was Labour cutting 20% and the coaltion 25%.

They never seem to manage to simplify the tax system except when we went down to low rate and 40% rate that did work and it was simpler and people had less incentive to engage in lawful avoidance than when rates were up to 99%. Now stamp duty is up to 5% you will get the same effect - more money for accountants.

I still support a tax NI merger (adn the universal benefit) in principle as they are at least an attempt at simplification.

Well, I approve of this move because I've always hated the name National Insurance. It's SUCH a lie; it doesn't insure ANYTHING.

However, I find some of the ideas people expound here strange. How can people still trust this government to cut 'red tape' and 'bureaucracy' instead of frontline services? What they have actually done is increased red tape and allowed administrators to decide where there will be cuts - which will, therefore not include cuts to the number of administrators or their salaries...

So this move is not a reform of the tax system as a whole. It's probably part of their effort to stick it to the middle, who were the main beneficiaries of the welfare state.

"Chil - you know better than that, there is no middle income trap. "

Maybe not in pure income tax terms but the HRT threshold is rapidly becoming the cut-off for other income-related items. You mentioned the CB change which is significant. Then there are things like student fees - subsidised for those on lower incomes. And student loans which have to be paid back by those with an income over a certain amount. Find yourself the wrong side of the reduced HRT threshold and the true financial impact can come as a nasty shock.

The argument that 'they can afford it' starts to wear a bit thin.

Very true which is why it may not happen as it will be complext to get right whilst aiming to be simple. ALso many man people work after the age of 65 and stop paying NI then, I think. They've contributed in to their pot over the years, served their time, paid what they will feel is their contribution to their state pension. So we would have to graduate it in well. Perhaps we could make so many cut backs that we can simply abolish employer and employee NI entirely and just put up all tax a little bit to compensate.

Flat tax of 40% on everything then including capital gains? Or 30%? Someone neesd to do the sums and if we removed 10% CGT and replaced with the old 40% we used to have would people be less enterprising and poor suffer as less tax is recovered?

I certainly think someone having to think will i do work all day at the weekend for extra pay whic might help towards our holiday and give 52% to the Govenrment or more if you're in one of the tax traps we have now we have more complex 3 rates not just two, might say can't be bothered to give more than what I earn to be misspent on defence and the idle poor. I'll not work particularly if working means less time with children. If it were more like 20% they might.

No one has ever achieved the holy grail of tax simplicity. The 10% Bulgaian flat tax looks attractive but probably none of us want to live there, we'd rather pick Zug. The reduction of the top rate to 4-0% frmop the 65% and 99% rates of old was a massive success and we've lost that through the new 50% rate and recent complications.

NI is only payable on earned income, and by employers.

If NI is broadened to all income, then it would be a big hit on pensioners, savers, and pension funds (thus reducing future pensioners' annuity rates). An age-related personal allowance would not be an adequate recompense, as it would not cover those who retired early (eg on medical grounds), and wouldn't necessarily have the right effect anyhow as retirement age becomes more flexible.

Paul88 - your numbers are for total tax rates by income?

But people pay different tax rates as their salary increases. When thinking about taking on extra work or 'down shifting' to a lower paid job people tend to make decisions based on their marginal rate of tax rather than total proportion of tax.

The phased loss of personal tax allowance at £100k causes some very high marginal tax rates (60%?). It will be useful to see research on how this impacts work choices.

I think we need to be clear what the primary purpose of tax is - raising income or fairness and redistribution? If the later -the result might be larger public service cuts.

It's certainly not smooth at the bottom. Even the universal benefit will see huge sums taken for every extra penny worked but the only way to deal very easily with that is give everyone whetehr they work or not a universal benefit - say £200 a week and then there is little incentive not to work as what you have is the same whether you work or not.

We could certainly do with some tax simplicity.

We are increasing the single person allowance next year to about £8k and the minimum wage is £13k a year and the average wage £20k. More people will pay 40% tax as the limit for that will come down but you add your £8k allowance on to work out if you're in the band. But let's say a lot more people will be paying 40% tax and NI and basic rate tax payers on 20% plus 11% nit are paying 31%. So we could surely presumably relatively easily simply devise a 40% tax and NI flat tax perhaps with the universal benefit as well to soften the blow.

Chil - you know better than that, there is no middle income trap. It is nothing like the very real trap that ChasingSquirrels and many more are in - and if you add in child care costs it is very very hard to find work that pays.

At the threshold you pay a bit more tax on the next £10 - you still get to keep the same amount of the previous £10. There is nothing wrong with that.

Of course you might be talking about the tories' stupid change to child benefit - would have been much fairer to women in particular to have decreased the higher rate threshold instead so that people are paying a bit more income tax in a fair way effectively cancelling out their child benefit.

I agree with KatyMac - a proper universal benefit / credit would be a great move. IDS has attempted this but again the child benefit change does the opposite. How unjoined up can you get. But you still need banded tax - charging a flat rate above this would be really regressive.

Chil - yes regressive means unfair and yes a change which would involve simultaneously clobbering the poor and looking after your rich mates would not look very good. But you could simplify by combining tax and NI into one without having a single rate. It is clearly fair that those on larger incomes pay a bigger proportion of their income in tax - they can afford it.

Here are some figures at current tax+NI rates of what percentage of gross income is paid in tax+NI:

£5,000 0%
£10,000 12%
£15,000 18%
£20,000 21%
£25,000 23%
£30,000 25%
£35,000 26%
£40,000 26%
£50,000 28%
£60,000 30%
£70,000 32%
£80,000 33%
£90,000 34%
£100,000 35%
£110,000 37%
£120,000 38%
£140,000 38%
£160,000 39%
£200,000 42%
£250,000 44%
£500,000 47%

calculated using www.uktaxcalculators.co.uk/

Nice smooth curve (although it wouldn't be if the new child benefit was in there). Gentle rise at the top - stop complaining rich people. I'd like to see it more gentle at the bottom.

@KingofHighVis... Maybe 30% is the wrong level, it might have to be 33% or 35% to balance the books. (This would cause ructions, of course!) Harmonise it with - as someone said earlier - the tax payable on other sources of income like interest on savings or dividends, make it simpler to collect and calculate, and there might not be much in it. Average household income in the UK is circa £25k...

NI is a nonsense and scrapping it would make life much easier for small employers (as an ex-nanny-employer it would have made my year) but I want to know what would happen to employers' NI contributions. I've heard some people say "just scrap it, make people cheaper to employ, make business more profitable and we'll get it back in corporation tax" but as we all know, large companies do not always pay the tax they should.

ivykaty44 I imagine that scrapping NI and then having a flat rate of 30% above a threhold of 10k would hugely reduce revenue

KatyMac: I think that used to happen - but family allowance and married man's allowance (you can tell from the name that it came from a different age) were abolished for independent taxation and child benefit.

Or a proper universal benefit where everyone in the country get £200 a week 'benefit' and pay tax at 50% on everything above that

What are the current NI linked benefits/payments at the moment?

The state pension is the obvious one (and reform is being investigated), then contributions-linked JSA. Are there any others?

There is a lot to be said for negative income tax

Give each adult & child a tax allowance; which is totally transferable between households then if your household earns less than this you get a top up; if you earn more you get taxed on it

Sorted

"some people will lose out and some will gain"

That's the problem with tax simplification. If people on higher incomes end up paying less tax then the government is accused of 'looking after their wealthy mates' and if people on lower incomes end up paying more tax then the cry is 'clobbering the poor'. Any move to a fairer flat rate somewhere between basic and higher rate would end up doing both at the same time.... therefore it ain't gonna happen, is it? :)

for the vast majority of people in PAYE systems we are ALREADY in the position of having a nil rate amount (personal allowance) and then an effective tax rate (tax and NI) of MORE THAN 30% (NI currently being 11%, and increasing to 12% next month).
I should think the vast majority of the population would therefore be happy with a 30% rate - but it wouldn't help the overall tax take, which isn't after all just "money for the government" it is money to fund the country that we all live in.

Additional rate tax payers, paying 50%, are paying a lot of tax. But the marginal rate on the lower earners - when you consider withdrawal of tax credits - is much higher. my personal marginal rate (tax, NI and tax credit withdrawal) is 73%.

What is needed is a total simplification, not tweaks and nudges.
And in that, some people will lose out and some will gain - there is no way round that.

I didn't say it was 'fair' to have a 0% tax rate but I think it's more efficient to not charge tax on small earnings, rather than go the circuitous route of taking tax with one hand and giving it back again with the other.

But a flat rate for everything over a certain amount would be far fairer than endless bands. I'm a HRT payer and am looking to change career. This means my gross salary would go down by 50% - pretty scary. However, having done the maths, I worked out - because of tax-banding and qualifying for certain benefits - that my take-home income would only drop by about 25%. I don't think that's at all justifiable and, like the poverty trap which discourages people from taking jobs, we seem to have created a 'middle income trap' to match where if you earn £10 below the threshold you are disproportionately better off than if you earn £10 above the threshold. It's just daft.

I would be happy for there to be a tax allowence for the first few thousand that you earn and then 30% after that for everyone.

it has always puzzled me why there should be a higher tax rate. You get paid more because you are either more highly skilled or because you are doing a risky job, or for another reason. Why should you give away more in percentage as well as absolute terms?

Interesting thread. Chil - sorry to accuse you of sweet stealing but I thought you meant a real flat rate. You want to keep a personal allowance - I'm glad to hear it - but then it isn't flat.

You say capped NI is fair as we all get the same pension - but we all know there is no relationship between NI revenues and pension payments even if there was once. The whole point of merging them would be to accept that this is the case.

So if it is fair to have a personal allowance - 0% tax for the first chunk of earnings - why isn't it also fair to have a lower rate of tax on the next chunk and then a higher rate? Seems absolutely spot on to me.

If we didn't have the complexity of NI I would advocate more bands - going up to at least 50%.