The key potential gain from integrating the income tax and national insurance (NI) systems is simplicity, in the form of reduced administration and compliance costs, greater transparency and the removal of technical anomalies between the two bodies of legislation.
It remains to be seen how, and to what extent, the systems would be integrated in practice, in particular, what would become of the employer NI charge, assuming that income tax and employee NI is merged into a combined charge on employees. Would the employer NI charge remain as a separate cost for employers or would the government be so bold as to either scrap employer NI or fully integrate employment taxes into a single, integrated charge levied on either employees or employers?
A radical overhaul of the status quo is unlikely to be politically palatable. Therefore, the employer NI charge would probably be retained in some form, so employees would ultimately see little change to their take-home pay, irrespective of whether the employee NI and income tax charges are merged.
However, if the tax and NI treatment of expenses and benefits are aligned, could this mean employee pension contributions not being subject to NI if the NI treatment follows the existing tax treatment?
Likewise, where a benefit is subject to Class 1A national insurance contributions (NICs), would there then be some sort of charge to replicate a similar benefit that would be subject to Class 1 NICs and therefore have an employee contribution element? These are examples of how integration could alter the landscape.
Graham Farquhar is a partner at Ernst and Young