Advertisement

Why simplifying our tax system is just too complicated

Any attempt to simplify the tax system is welcome. But merging income tax with National Insurance will be far from easy, says Merryn Somerset Webb.

We have written here before several times before that merging National Insurance (NI) and income tax would be an honest thing for a government to do.

There is no special insurance fund in the UK that somehow pays for welfare, social care and the NHS, everything goes into and comes out of the same pot. National Insurance is just income tax by another name, so why not just say it like it is (we are keen on this kind of thing) and call it income tax?

Advertisement - Article continues below

The Independent suggested at the weekend that George Osborne is keen to have a go so much so that he almost announced it in his last Budget, and is sure to do so if his party wins another election. I wonder if he really will.

His excuse for not doing it already is apparently that it would involve the merging of two computer systems and that's complicated. But it is nowhere near as complicated as some of the other issues that merging the two taxes would throw up.

Advertisement
Advertisement - Article continues below

There is the fact that NI kicks in at a lower rate than income tax so it would suddenly become obvious that the raising of the income tax threshold to £10,000 hasn't actually taken x number of people out of the income tax net.

Then there is the fact that pensioners don't pay NI so, it would suddenly become obvious to the already resentful younger generation that they are paying a lot more tax than the older generation, despite the fact that they are unlikely to see the same benefits (is anyone expecting there to be non-means-tested winter fuel payments in 30 years?).

Advertisement - Article continues below

Next is the way it would affect pensions. If you save into your pension via salary sacrifice, your NI gets chucked in too. If you don't, it doesn't. But if NI were income tax, everyone would get the extra relief. That could be expensive.There are similar problems with other employee benefits.

Then there is the difference between the tax rates on earned income and unearned income. It is irritating that you pay more in income tax than you pay on dividends. But call NI an income tax and it will become clear just how much more.

Earn over the higher rate threshold and you pay 42% on your earned income and 25% on your dividends (the 10% tax credit is a notional nonsense I'm ignoring it).At the lower rate, it is 32% (yes, the basic rate of tax in the UK is 32%) and 0%.

The same problem would arise with savings accounts you pay no NI on the interest from these, so it would immediately be obvious to people that if they were working, they would be paying 32% in income tax, but that if they were living off savings, they would be paying 20%.

I'm all for the merger and all for tax simplification, but this discussion makes one thing at least clear: our tax system is so complicated that it is virtually impossible for even well-meaning politicians to simplify.

PS Want to know what your effective income tax rate is? Damien Fahy of Moneytothemasses.com suggests visiting listentotaxman.com. Enter your gross salary and tax code and click 'calculate'. Take the resulting number and divide it by your gross salary. Tell us how shocked you are (or not) below.

Advertisement
Advertisement

Recommended

What are the best ways of raising more money in tax?
Economy

What are the best ways of raising more money in tax?

Given that whoever wins next week's election will be going on a massive spending spree, we're going to need to raise at least some of that money throu…
5 Dec 2019
What are the biggest mistakes investors make when it comes to tax?
Investment strategy

What are the biggest mistakes investors make when it comes to tax?

The tax implications of an investment are something we rarely consider until after the event. That could prove to be an expensive mistake, says Domini…
27 Nov 2019
How tax has shaped the course of human history
Economy

How tax has shaped the course of human history

Taxation is as old as civilisation itself. But how much is too much? Dominic Frisby looks at how taxation, war and society have evolved together over …
16 Oct 2019
Are you due a refund on your inheritance tax bill?
Inheritance tax

Are you due a refund on your inheritance tax bill?

If you’ve paid inheritance tax recently, you may well be due some of your money back. Here’s how to tell
23 Jun 2020

Most Popular

How “support” and “resistance” can help you spot trading opportunities
Sponsored

How “support” and “resistance” can help you spot trading opportunities

Technical analysis can help traders manage risk and decide where to enter and exit a trade. One simple form of technical analysis is the concept of “s…
6 Jul 2020
House price crash: UK property prices are falling – so where next?
Property

House price crash: UK property prices are falling – so where next?

With UK property prices falling for the first time in eight years, are we about to see a house price crash? John Stepek looks at what’s behind the sli…
2 Jul 2020
An economics lesson from my barber
Inflation

An economics lesson from my barber

On reopening his shop after lockdown, Dominic Frisby’s barber doubled his prices. It’s all part of the post-Covid inflation process – and we’re going …
8 Jul 2020