Merging NI and income tax

[longfingernails]

There are rumours that George Osborne will merge NI and income tax in the Budget.

What a superb idea!

Simplify the system, and make Britain's true ~65% income tax apparent to all - then cut the true income tax rate by scrapping more quangos, cutting red tape, and clamping down harder on benefit scroungers.

No more will future Labour governments be able to hike the income-tax-in-all-but-name.

dreamingofun - the policies so far don't seem to be benefiting the rich - raising the level you start paying income tax

How does that not benefit the rich - if we raise the level of which you start paying tax to £7.500k from £6.500k then everyone starts at that point rich as well as lower incomes

ivy - the pay rate you start paying higher rate tax has been lowered. this means that people who earn around 40k who previously didn't pay 40% tax now will. so they will in effect pay more as they will pay at 40% instead of 30%

newwave - closing public services doesn't benefit the rich either. where some services are being cut here the council is asking the better off people to pay for them (over and above the payment they've already made as part of the rates)

@ivykaty... the tax-free allowance will be reduced for HRT payers on a sliding scale. When it goes up to £10,000 for those on low incomes, HRT payers will still be paying tax on a large proportion of it. The headlines look good but the devil is in the small-print.

But chil - HRT pay 1% NI over what 42k - where as I pay 10% NI on all Ni taxable earning...

Because we all get back the same pension when we hit retirement age, there's a cap on contributions. HRT payers pay 40% income tax + 1%... you're paying 20% income tax + 10%... I'd say you're getting a pretty good deal.

I tried following the link above, but the article was behind a paywall. Looking at others (from other newspaper), it seems that all there is at the moment is a statement that Osbourne is personally "in sympathy" with the simplification agenda, that changes would be on a long term timeline, not a sudden change, and that this is being discussed in terms of taxes on earnings (which would take all pensioners out if the equation).

No word on contributions based benefits - presumably these would have to be abolished first? Reform to state pension being the biggie, presumably.

HRT pays don't pay 40% income tax on all there earning, they pay 20% on lower earnings - or are you saying the HRT pay 40% from 6500k if they earn over 42k?

HRT payers enjoy a tax free allowance, then pay 20% tax and 10% NI same as everyone else up to the HRT threshold. Then they pay 40% plus NI up to the cap. A capped NI is fair if we designate that it is to pay for a state pension which has a fixed maximum.

If/when the tax free personal allowance increases to £10k, HRT payers won't get that ... which was my point earlier. The tax-free allowance for HRT payers will remain down at £6k or so. Only people on low incomes will get the £10k personal allowance. So introducing a £10k personal allowance doesn't benefit everyone equally.

So HRT earners will pay income tax on a larger proportion of there income and 9% less NI on the high rate of their income.

Which justs adds to the point that the tax system is so complex it would be far better to have a simpler tax system that was on a sliding scale that the more you earn the slightly more you pay in tax - rather earning more and paying less and earning more and paying more and earning less and paying more and earning less and paying less as we do now

Absolutely I agree with you about making the whole thing simpler. If we had a flat rate of 30%, say, that applied to everyone equally and applied to everything earned over £10k then those on a higher income would pay the most and those on a lower income would pay the least. Pensions would be funded out of the general taxation.... accountants would be twiddling their thumbs :)

PAYE itself will have to be reformed soon. It's far too slow and cumbersome for today's more mobile workforce. It's OK if you stay in the same company for your whole career but, if there are any changes to your pay, benefits or employer, it can take an age for the whole thing to catch up. (Speaks from experience!)

Of course HRT payers start to lose their personal allowance once their income is greater than £100k (I think). The highest rate tax payers (£150k plus) get no personal allowance and pay 50% tax. One of the highest tax rates in Europe.

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%.

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?

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.

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.

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.

"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? :)

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

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?

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

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.

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

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.

@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...

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.