The potential integration of income tax and NICs received a mixed reception, even though businesses have frequently argued that it would cut their compliance burden.
The impact of integration on the structure of reward packages in the UK will depend on what integration ultimately means. Currently, the key three components of reward are cash, benefits and equity. Cash is subject to tax and NICs, while most benefits (with the notable exceptions of pension contributions and life cover) are taxed, but only subject to employers’ NICs. Equity is taxed but the NIC position depends on whether there is a market for the shares.
If integration results in employees’ and employers’ NICs being due on all elements of reward that are subject to income tax, it is likely to have a major impact on the design of reward packages. Post-integration, I expect to see fewer flexible benefit schemes. Employers will question why they should incur the administrative time involved in providing benefits such as private medical care, dental and gym membership, and instead increase the cash element of reward. They may also look for such benefits to be provided through voluntary arrangements where employees use their after-tax and after-NIC income to purchase the benefits at a substantial discount to what they would have cost had they sourced them personally.
If integration results in full alignment of income tax and NICs, it will have a major impact on, for example, family businesses where reward using equity is currently likely to be NIC free. The cost to such businesses of paying NIC could cause a real problem for succession planning.
Inez Anderson, corporate tax director at Smith and Williamson