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National Insurance

Merging Income Tax and National Insurance would just be more honest

Nov 15th, 2011
by Matthew Sinclair.
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Over the weekend Kamal Ahmed, Business Editor at the Sunday Telegraph,  reported that the Government is slowly moving towards simplifying the tax system by at least merging the administration of Income Tax and National Insurance. Our research on the growing complexity of Britain’s tax code shows that an ambitious attempt to simplify the system is needed. And in another recent paper we showed how a full merger was possible.

A full merger, and bringing the two taxes together instead of just having them work the same way behind the scenes, isn’t just simpler.  It would also be more honest. Here is a simple new video, produced with visualisation experts See What You Mean, that sets out how the tax system understates how much we’re really paying, in Income Tax and Employees’ National Insurance – even before we get onto Employers’ National Insurance which also depresses your wages:

Click here to tweet the video to your family and friends

Mixed messages from the Government on tax transparency and simplification

Nov 14th, 2011
by Jonathan Isaby.
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Campaigning for the tax system to be more transparent and simpler has always been one of the core missions of the TaxPayers’ Alliance.

And so in broad terms we very much welcome the consultation which was launched this morning by Treasury Minister David Gauke entitled Modernising the administration of the personal tax system: Tax Transparency for Individuals.

The opening line of the document states:

“The Government wants to hear views on how increased transparency and accessibility to tax information can build greater awareness and understanding of how the system works.”

Frankly, it ought to read: “Increased transparency and accessibility to tax information DOES build greater awareness and understanding of how the system works – so we are going to get on and do it.”

Frustrations about the pace at which the wheels of government turn aside (the document is now subject to a 12-week consultation, which should at least allow the Chancellor to deliver some action in the Budget next March), most of the substance and direction of it is to be welcomed.

The Government is already looking at how in some other countries there are systems in operation whereby individuals can go online to see how much they are paying in tax month-by-month and year-on-year.

At the event launching the consultation this morning, David Gauke showed prepared mock-ups of what a personal HMRC web page could look like for Britons. This would enable people easily to see how much of their income goes on income tax and national insurance contributions – including the oft-forgotten employer’s element of the NICs. This would show people year-on-year whether they were paying more or less in tax and would indeed be a welcome leap forward in transparency. As this video produced by the Treasury itself demonstrates, there is widespread public ignorance about how much tax they are actually paying:

Also today, the Government published its latest position on the integration of the operation of income tax and National Insurance Contributions, in response to a consultation it held on the issue earlier this year.

The TaxPayers’ Alliance has called for a complete merger of National Insurance and Income Tax, as explained in our recent report, Abolish National Insurance, and that is what we recommended in our response to the consultation: National Insurance is almost indistinguishable from Income Tax in its function of raising revenue and the current system obscures public understanding of tax on earnings.

It is disappointing, therefore, that the Government has not been persuaded of the merits of this case, concluding as it does that that it wishes NICs to “retain an identity distinguishable from income tax” as part of maintaining the so-called contributory principle.

It does, however, accept that “closer integration of the operation of income tax and NICS has the potential to reduce burdens on business, remove economic distortions and improve fairness” – although does not foresee being able to implement any changes until “around 2017”.

At a time when businesses are crying out for red tape to be reduced, five years does seem an extraordinarily long time to wait for any action on this.

Britain’s relative problem with youth unemployment has been growing for a while

Oct 13th, 2011
by Matthew Sinclair.
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It is a real tragedy that so many young people aren’t able to find work. According to the Office for National Statistics, 721,000 16 to 24 year olds were unemployed in the three months to August this year, excluding full-time students. Lots of young school leavers and graduates are facing pretty grim prospects with a slow recovery from the economic crisis across the developed world.

But it is important that we are clear about the source of our particular relative problem. The graph below uses OECD data to show how the percentage of young people not in education, employment or training (NEETs) rose in Britain between 1997 and 2007 – before the recession – while falling in the rest of of the developed world:

So why did that happen?

Young people with less experience tend to be less valuable to their employers. That’s why we tend to earn more as we get older. If the Government takes action that makes it more expensive to employ people the first to be priced out of employment, as it costs more to employ them than it is worth an employer paying, are often young (or female, or from an ethnic minority).

Politicians have done a series of things that have made it more expensive to employ people, particularly on low incomes:

  • Increased employers’ national insurance.
  • Implemented domestic regulations like the National Minimum Wage.
  • Implemented European Union regulations like the Agency Worker Directive.

By contrast, back in 2002 then German Chancellor Gerhard Schröder confronted the country’s economic malaise by cutting non-wage labour costs. He took on opposition from the haves who liked the expensive entitlements that those policies provided. Along with an education system preparing people for the world of work, which hopefully reforms like free schools can start to build here, the action he took then has been critical to Germany’s strong economic performance now.

Other taxes like Corporation Tax are also important. If they deter investment and enterprise then that means fewer employers looking to hire people in the first place. And we need to reform a benefit system that seriously undermines the incentive for some people to work.

But the critical thing now is that we stop driving a wedge between what employers’ are able to pay and what employees receive that leaves many sitting at home on benefits who should be in work. Cutting non-wage labour costs is vital to help the most vulnerable people in the labour market.

Ed Balls needs to rethink the growth plan he announced at Labour conference

Sep 27th, 2011
by Rory Meakin.
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Ed Balls rightly pointed out that the Coalition isn’t doing enough to create the conditions for growth in his speech to the Labour Party conference in Liverpool yesterday. However, his five-point plan for growth failed to meet the challenge he identified.

The shadow chancellor proposed five measures aimed at boosting growth. I’ve listed them below, along with what he should have suggested instead:

1. Repeat the Bankers’ Bonus Tax to pay for 25,000 subsidised homes.

High taxes solve no problems and are already deterring financial companies from remaining in the UK. A better solution would be to pass legislation preventing the Government from ever wasting taxpayers’ money on bailing out rotten financial institutions again. Meanwhile, a cut in Capital Gains Tax would do more to encourage more homes to be built.

2. Bring forward expenditure on major infrastructure projects to increase aggregate demand.

The problem isn’t a lack of demand. The problem is excess debt and misallocated resources. The solution to this problem isn’t in higher deficit spending, it’s in lower taxes and greater market discipline in the economy. A cut in Corporation Tax is the best way to encourage sensible investment in the economy.

3. Reassign home improvements and maintenance bills from the standard to the reduced (5 per cent) rate of VAT.

Lowering VAT is a laudable aim, but introducing new complexity by targeting specific types of goods will only add to distortions and compliance costs. A better tax cut in the housing market would be to abolish stamp duty. This would encourage people to move to where jobs are and stop taxes from getting in the way of the right homes going to the right owners as people’s circumstances change.

4. Reverse the VAT rise, taking it back to 17.5 per cent.

The shadow chancellor is right to point out that the Coalition were wrong to raise VAT, and he’s right to call for it to be reversed. But a better way to stimulate employment and help the poor would be to increase the personal allowance so that the poorest keep more of what they earn and aren’t penalised for working.

5. Provide a one year break from National Insurance for small firms taking on extra workers.

The Coalition have already attempted a similar scheme and the response has been very underwhelming. A one-off gimmick is not going to get people back into work. Better to cut National Insurance permanently and better still abolish it. Not just for small firms but all companies. We need jobs wherever they might be generated, not just from companies in politically popular sizes.

The Bank of Rotherham

Sep 15th, 2011
by Andrew Allison.
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At a time when Rotherham Council is cutting its budget and making some of its employees redundant, you wouldn’t think it had any spare cash to splash, would you?

Well, you’d be wrong, because the council who spent £2.9 million refurbishing its Town Hall (including £310,000 on chairs and coverings) has recently spent almost £10 million on furnishing its new multi-million pound offices. But that isn’t all it’s been using our money for.

The council also seems to see its future in the banking industry. Last year it loaned £5 million to Rotherham College to help build a new state of the art building on its campus. Recently it managed to find another £5 million to loan to Rotherham United Football Club. Yesterday I was interviewed on BBC Radio Sheffield about the council’s decision to loan a local businessman £750K to help renovate six buildings in the town. He argued that one of the town’s oldest buildings, the former 15th century coaching inn, the Three Cranes, will be part of the plans to rejuvenate the town. The council agreed to loan him this money despite banks refusing to do so on the terms he wanted.

Council taxpayers in the town are not happy, and rightly so. They want to see their money being spent on frontline services, not on expensive refurbishments and loans. The council has said it has guarantees on the loan, which of course means if it could not be paid back it would assume ownership of the properties. At a time when many councils are reducing the size of their property portfolios, Rotherham is potentially adding to theirs.

Putting to one side whether or not they are sound investments (which is questionable) councils are not there to act as banks. Spare cash should be used to help protect front-line services, and fund reductions in council tax. Although all of us want to see our town and city centres flourish, councils can help by reducing car parking charges. The government can assist by reducing the amount businesses pay in corporation tax and business rates. It can look at the levels of employers’ national insurance contributions. There are many ways to stimulate the market without councils resorting to loaning vast sums of our money on deals the banks won’t touch.

Treasury ‘call for evidence’ on merging National Insurance Contributions and Income Tax

Sep 14th, 2011
by Rory Meakin.
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In his Budget 2011 speech the Chancellor signalled his intention to look into the operation of Income Tax and National Insurance Contributions. HMRC and the Treasury launched a “Call for Evidence” which expires this Monday, 19th September. The consultation includes 14 questions which have been copied below. The first three are of general interest and are aimed at everyone, and the others are more technical, aimed at HR professionals and employers.

If you want to respond so policy-makers in Government know your thoughts about the complexity and burdens of running separate systems of taxing income, please email incometaxnics.simplification@hmtreasury.gsi.gov.uk with your comments. We have reproduced the questions below and, for the general interest questions, provided brief suggestions.

General interest questions:

1. The Government believes that integrating the operation of income tax and NICs may have the potential to remove distortions, reduce burdens on business and improve fairness. Do you have any comments on these objectives?
You might want to mention transparency, and suggest that this objective, along with the others listed, could be much more effectively achieved by considering employers’ National Insurance Contributions (NICs) as well as employees’ contributions.

2. Of the differences between income tax and NICs listed in Table 1.A (or any others that you consider important) which do you see as the most significant in terms of their impact on: a economic distortions; b burdens on employers; c fairness?
Again, employers’ NICs impact upon these criteria so you may want to mention them here, too.

3. What do you think are the most important steps that could be taken to reduce the effects on: a economic distortions; b burdens on employers; c fairness?
Would some degree of tinkering with the existing, complicated system be best or should the Government be bolder and abolish NICs altogether and adjust Income Tax accordingly?

Employers and Payroll Professionals:
4. Under the current system, how much staff time and/or other resource is required to carry out income tax and NICs processes? Please give a score on a scale from 1 to 5 where 1 is only a small amount of time/resource and 5 is a great deal of time/resource for each of the following:
a) Familiarisation: understanding HMRC’s requirements, legislation and guidance.
b) Retrieval of information: obtaining the information required to run a PAYE payroll.
c) Record keeping: maintaining the records needed for income and NICs purposes e.g. keeping copies of returns/letters where necessary.
d) Calculation: calculating and checking income tax and NICs due (including in-year and end of year processes).
e) Provision of information to HMRC: reporting of information to HMRC e.g. P45s for new employees.
f) Provision of information to employees: reporting and providing information to employees e.g. year end P60s.
g) Payment of liabilities: paying income tax and NICs to HMRC.
5. Which aspects of the current income tax and NICs process work well for your business?
6. Do you carry out income tax and NICs obligations together? Are there any elements you carry out separately?
7. What effect do differences between income tax and NICs have on wider payroll processes such as expenses and benefits, statutory payments and student loans deductions?
8. Which of the differences between income tax and NICs are dealt with largely automatically by payroll software and which require significant manual working? Where manual working is required how straight forward is this?
9. Are there particular issues that occur in the calculation of income tax and NICs?
10. How often is it necessary to correct income tax or NICs calculations and which are the most time consuming to correct?
11. Do you have any comments about difficulties in designing or using software resulting from the differences identified in Table 1.A (or any others that you consider important)?
12. What do you see as the main differences between income tax and NICs in relation to employees you have who work internationally?
13. Which of the differences outlined in question 12 are dealt with largely automatically by payroll software and which require significant manual working? Where manual working is required how straightforward is this?
14 Do you have any views on how the introduction of Real Time Information (RTI) may affect the cost and benefits of income tax and NICs integration?

Forget 20p, CPS report says, tax on income at basic rate is over 40p

Aug 19th, 2011
by Rory Meakin.
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The Centre for Policy Studies (CPS) have published a factsheet today on how much tax you really pay on your income. Ryan Bourne smashes the myth that tax rates in Britain are just 20, 40 and 50 per cent by combining the various taxes on income into a single “marginal effective tax rate”.

Income Tax, employees National Insurance and employers National Insurance are all combined and adjusted to calculate how much marginal tax people really pay at various levels. The results are a lot higher than most of the comment in the media would lead you to believe.

The real basic rate is 40.2p, not 20p. The real higher rate is 49.0p, not 40p. And the real additional rate is 57.8p, not 50p. But it gets worse than that. Those earning between £100,000 and £114,950 face a rate of 66.6 per cent because in this range £1 of the personal allowance of tax free income is withdrawn for every £2 earned at the same time as having to pay Income Tax and both National Insurance rates.

Worst of all, the greatest loss of income (including both taxes and welfare withdrawal) to the Treasury will fall on some low earners at 79.1 per cent, and that’s even after the Universal Credit has been introduced. Until then, the rate is an incredible 96 per cent. The Director of the CPS, Tim Knox, said:

This factsheet shows up some of the inadequacies and inconsistencies of the UK’s personal taxation system. But the most important aspect it highlights is the need for transparency. We should stop talking about a 20, 40 or 50 per cent tax band and accept that the real marginal rates are much higher.

It’s time for the tax system to be radically overhauled to make it simple, transparent and honest. Britain’s tax system now is none of those things: impossibly complicated, disgracefully opaque and public debate that borders on downright dishonest. It needs fundamental change.

The TaxPayers’ Alliance and Institute of Directors major joint project, the 2020 Tax Commission has been undertaking just this task since January and will publish a comprehensive review in Spring next year. In the meantime, we should at the very least insist politicians and media commentators acknowledge that tax at the basic rate is over 40 per cent, not 20.

National Insurance holiday scheme still a flop, says Balls. Time to cut it, Osborne

Aug 1st, 2011
by Rory Meakin.
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The Government’s National Insurance holiday scheme is a “total flop”, according to Shadow Chancellor of the Exchequer Ed Balls. The scheme, which exempts small firms (those with 10 or fewer staff) from having to pay National Insurance for a 12 month period, has attracted just 5,000 registrations out of a total of 400,000 expected to benefit from the scheme.

“George Osborne hailed this flagship policy last year saying it could create 800,000 private sector jobs. But it’s turned out to be a total flop with just 1 per cent of the 400,000 businesses George Osborne said would benefit taking advantage”.

This should come as no surprise. The scheme only applies for 12 months and doesn’t apply in the areas most likely to generate new business; London, the South East and Eastern regions of England. As I wrote back in February, the Chancellor should learn from the mistakes of his predecessors and abandon the doomed-to-failure micro-managing from his Whitehall citadel.

Scheme "a total flop" says Balls

Back in February, the Treasury said it was “too early to tell” if the scheme was working. Now they say they are taking steps to “improve” the scheme and encourage more participation. It’s not too early to tell, now. The scheme has failed. But as the Treasury are in the mood for taking steps to improve the scheme, here’s a suggestion: reverse the rise you implemented in April.

National Insurance is among the worst forms of taxation in the current tax code. Outmoded, complex and arcane, National Insurance is a tax on jobs that mimics and duplicates Income Tax but manages to be even more damaging. Instead of fiddling about with pointless schemes such as this payment holiday, George Osborne should cut the rate for all businesses. Better still, he should abolish it altogether.

Boris Johnson agrees, lacklustre growth figures mean we need targeted tax cuts now

Jul 28th, 2011
by Rory Meakin.
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Figures released on Tuesday show the economy grew by just 0.2 per cent in the first quarter of this financial year. Initial estimates are usually revised up, subsequently. In addition, the Japanese tsunami and earthquake, the Royal Wedding, unseasonal heat and the delay in counting Olympic ticket sales have all been used by the ONS to save ministerial blushes for the disappointing figures. Is there really much of a macroeconomic impact from warm weather, for example? Wouldn’t spending simply be switched from heating and sweaters to ice-creams and shorts? But even ignoring all that the number is a serious disappointment, if not an unexpected one. Growth should be a lot higher and the Government’s continued high spending and failure to get to grips with supply side reforms is getting in the way. Ed Balls, the Shadow Chancellor of the Exchequer, voiced concern about the low figure:

“The economy has effectively flatlined for nine months and this is very bad news for jobs, living standards, business investment and for getting the deficit down”

At the same stage following the 1990-91 recession the economy was growing 5 times as fast as it is now. Fast growth following a recession should be expected, as depressed asset prices and wage levels tempt firms to make use of the capacity freed up during the contraction. Despite the rhetoric surrounding supposed cuts, the Government has continued to increase spending which has meant it is still employing staff, occupying offices and purchasing the supplies that would normally now be in the process of being reallocated into more productive and efficient use by price signals and market forces. With the Government still spending over half of the economy’s output, the room for the private sector to generate economic growth is much smaller than back in the early 1990s when the Government’s share was closer to 40 per cent.

Quarterly economic growth, 2007-11 and 1990-94

Research has shown that an economy with a 10 per cent higher share of GDP being consumed by government will suffer from growth rate approximately 1 per cent lower than otherwise. But it’s not just aggregate spending figures which have conspired to fetter the nation’s economic prospects. The cumulative effect of two decades of gold-plated regulations from Whitehall and Brussels and tougher planning restrictions have also served to restrict the economy’s ability to adapt to changing conditions and preferences in society. Cities of London and Westminster MP, Mark Field, has highlighted the need for loosening the restrictions in the economy:

“As a matter of urgency we need to start implementing micro or supply side initiatives designed to free up small and medium size enterprises (SMEs). We have to ‘think the unthinkable’ and cut the regulatory and taxation framework which hinders many SMEs”

Fortunately, what needs to be done is not terribly unthinkable. On the regulatory front, hack back the thicket of over-zealous box-ticking regulations in town planning, health and safety and labour markets. Unwinding those regulations back to a sensible framework is no mean task but it is certainly not unthinkable. Similarly daunting is the task of overhauling Britain’s enormously over-complicated tax code. The 2020 Tax Commission , a major joint project with the Institute of Directors, is taking on this task and will produce a root-and-branch overhaul of the system in early 2012. But there are things that can and should be done right now, too.

Contributing to the ConservativeHome Growth Manifesto from London think tanks, Matt Sinclair, Director of the TaxPayers’ Alliance, said we should cut National Insurance, cut Corporation Tax faster and axe the 50p income tax band. Twelve other organisations contributed further pro-growth reforms that should give the Government plenty to be getting on with. Some, such as the European Trade Union Institute’s Duncan Weldon, at a BBC Radio 4 debate, have criticised the manifesto for not being a response to slow growth because we always propose such policies. The reason for this is simple. Supply side reforms always boost growth and we are always in favour of growth and prosperity, not just when the economy has been particularly wrecked by profligate spending, burdensome taxes and a mountain of debt.

Fortunately, the political momentum for tax cuts is growing and Mayor of London Boris Johnson called on the Government to scrap the 50p rate and cut National Insurance in yesterday’s Daily Telegraph:

“You’ve got to look at ways of stimulating growth now, and certainly I think you should look at National Insurance, you should look at ways of stimulating consumption confidence in the market”

Politicians from across the political spectrum who recognise the need for economic growth should join the Mayor of London in backing our proposed tax cuts.

National Insurance is archaic, confusing and opaque. Abolish it

Mar 21st, 2011
by Rory Meakin.
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George Osborne has a ‘secret plan‘ to merge National Insurance (NI) into Income Tax according to Thursday’s Independent, a story followed up in the weekend papers. National Insurance, which raises approximately £100 billion annually will be abolished while Income Tax, which raises about £150 billion, will be raised to compensate for the loss of tax revenues. The Office of Tax Simplification’s survey of businesses found almost unanimous support for the idea, which would save both business and HMRC money in administration costs. An unnamed minister told the newspaper:

“The changes to benefits could tip the balance in favour of merging tax and national insurance. It would be a radical reform and lasting legacy for the Government. We don’t want to be remembered for cuts, cuts and more cuts.”

The changes in question are the replacement of various benefits with a ‘Universal Credit’ and the introduction of a single flat rate state pension, both of which will break the link between NI contributions and benefit payments obliterating the bulk of the already scrawny last vestiges of its insurance function and making it what it effectively already is: a second income tax with different rates, different thresholds and different applicability and, in case all that isn’t already needlessly opaque and complicated enough, it’s split into separate payments for employers and employees, too.

Satisfyingly transparent

Combining Employee’s NI (scheduled to rise from 11 to 12 per cent in April) with the basic rate of Income Tax (currently 20 per cent) would be a great step forward for transparency and simplification leaving us with a new Income Tax rate of 31 or 32 per cent, a number much closer to the truth. But to be truly radical, the so-called Employer’s NI ought to be abolished, too. To make up for the lost tax revenues from someone earning a regular salary of £30,000, assuming salary levels rise to the extent Employer’s NI is no longer collected,  Income Tax would need to be set at just over 39 per cent. This percentage is produced by dividing the total tax amount by the true income (£33,108, a combination of both the salary and the employer’s NI contribution) less the Personal Allowance (all rates and thresholds 2009-10).

Salary: £30,000

Employer’s NI: £3,108
Employee’s NI: £2,671
Income Tax: £4,705

Total Tax: £10,484

The above calculations are very rough and do not account for employers’ or employees’ pension contributions, which would increase the rate required for the Treasury to take the same money. They also don’t account for the fact that there are a plethora of different rates for the self-employed, married women and others, as you can see on this HMRC table. These lower the required percentage, as would applying the new rate to income from savings and dividends, which are both currently administered separately. But it does show how the rate would be less than a simple combination of the three existing rates for a typical basic rate employee (20, 12.8 and 12.8 per cent).

Also at the Independent, Sean O’Grady produced an interesting graph of the effective marginal tax rates from a combination of Income Tax, employee’s NI and tax credits showing the bizarre complexity and irrationality of the system. A merger would significantly simplify the system we all face but would be a brave move for the Chancellor that would draw attention to how much tax we really do pay. It’s perfectly possible to work out what our employers pay in their employer’s NI contributions and then add this to the separate Income Tax and employee’s National Insurance figures to find out how much tax we pay. But how many of us do? Reform would mean the calculation would be done for us, showing on each payslip our true pre-tax income rather than maintaining the pretence that employer’s NI is somehow a mysterious other only to be known by the payroll department and HMRC.

The Chancellor should rise to the challenge and lay bare to each one of us how much we earn and, in one single number on our payslips, how much direct tax we pay. Listen to the IFS and your own Office for Tax Simplification and businesses up and down the country. Abolish National Insurance, Mr Osborne.

Simplicity begets simplicity, from Pensions to National Insurance

Mar 8th, 2011
by Rory Meakin.
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Plans to reform the state pension system into a single payment of around £140 per week could provide a route to a simpler income tax system, too. Work and Pensions Secretary Iain Duncan Smith is to signal that the Government intends to scrap the current system of a Basic State Pension, Additional State Pension and Pension Credit with a single flat payment. The crucial detail for personal taxation is that it may no longer be linked with National Insurance (NI) payments. The insurance function of NI has dwindled over the decades and, if the link with pensions is removed, NI will wholly act simply as what it effectively already is: an additional form of income tax assessed weekly instead of annually with different thresholds and rates.

Mr Duncan Smith will criticize the complexity and perverse incentives of the pension system in a speech to Age Concern today:

“The state pension system is so complex that most people have no idea what it will mean for them now and in their retirement.

“Too many people on low incomes who do the right thing in saving for their retirement find those savings clawed back through means-testing. We have to change this.”

Thinking about simplicity?

With a consensus of economic opinion that believes business investment and exports are the only realistic sources of growth (due to high levels of both consumer and government indebtedness) a pension reform which removes a disincentive to save could have significant beneficial effects across the wider economy. Perhaps as important is the opportunity such a move presents for simplifying personal taxation by merging the National Insurance system into the Income Tax system. Complexity is itself costly. As well as it forcing everyone to have to spend time working out the tax system, it also imposes an information penalty on economic activity. People often simply discount economic gains by a larger amount than they think is likely because they don’t have the inclination to sit down and work out the exact sums. Faced with uncertainty and risk from a lack of knowledge, we become wary of risk: Better to be on the safe side and assume the worst

Like any change, reform of the pension system will mean some will lose out – such as those in well-paid, steady jobs who can receive as much as £200 per week from the various current state pension systems. While there will be pressure for a new system to minimise the financial impact on those who might be worse off, the Government must also ensure that any change is fair to taxpayers, too. But the government should take the opportunity to dismantle the needless complexity of the dual Income Tax and National Insurance systems of personal taxation.

Too often, increasing complexity in government spending has led to increasing complexity in taxation and vice versa. Attempts to tackle unintended consequences of an initial policy have often met with ‘solutions’ creating still more complexity and a new set of unintended consequences. Conversely, a simplification of tax made possible by a simplification of spending would represent a pleasing reversal of this seemingly unstoppable process. The time to abolish National Insurance is now.

Simpler, lower taxes not fiddly, complicated NIC schemes

Feb 8th, 2011
by Rory Meakin.
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A key policy in George Osborne’s growth strategy has attracted remarkably scant take-up since it was announced in the June Budget. A National Insurance Contributions (NIC) holiday for small new businesses not located in London and the South East exempts start-up firms from NICs for the first 10 staff they hire for 12 months, but the results have been disappointing. So far a grand total of just 10 staff have been taken on nationwide under the scheme. The head of the Office for Budget Responsibility, former Institute for Fiscal Studies director Robert Chote said the scheme may be “a little too complicated”:

“The national insurance break for start-ups looks complicated, potentially prone to avoidance and oddly targeted.”

Navigating the tax rules

It’s easy to see why the government chose to target the scheme in the way they have. It specifically excludes businesses in London, Eastern and the South East regions, regions which already have lower unemployment and traditionally recover sooner from recessions. Excluding them from benefiting from pro-growth policies fits into the Chancellor’s ambition to ‘rebalance’ the economy so it is less reliant on London and the surrounding regions. And most jobs are created by small and medium sized enterprises. Somewhere among the start-ups being formed now are the big, successful companies of the future. But can we afford to keep ignoring opportunities for growth in the South just because they don’t match the Chancellor’s grandiose ideas about ‘rebalancing’ the economy? What’s so special about the first 10 jobs, what’s so different about a firm’s 11th employee? And why are only new firms favoured? Is a 2 year old company trying to expand or struggling to retain its staff so different?

Treasury officials may insist that it’s “too early to tell” if it’s working. But fiddly, complicated schemes like this which only add to the complexity of the tax code with additional rules, eligibility criteria and rates are woefully inadequate for the task of rebuilding Britain’s economy and creating the conditions for growth, prosperity and jobs to drag the country out of the economic malaise. The Chancellor should abandon his ambitions to direct the economy from his Whitehall citadel and content himself with the task of removing the obstacles to growth which government creates. We need a radically simpler tax system with fewer exemptions, fewer special schemes and fewer but lower rates.

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