Monday, 21 March 2011

Tax - does it have to be taxing?

There was another interesting piece in the Lib Dem voice last Friday regarding tax reforms, in particular the potential combination of National Insurance and Income Tax.  I know this has been mentioned for quite some time but until I saw that blog I wasn't aware it was so far up the agenda.  

As someone who worked in tax for a few years (and now no longer relies on it's complexity for my living) I have to say that in general this is a welcome reform.  The actual contributions basis of social security has long been irrelevant whilst it will prevent the income tax rise by another name by adjusting the NI levels set by the government.  In fact at a time when we are rightly pleased by the lifting of people out of Income Tax by raising the threshold and saving every other basic rate payer £200 on their income tax bill, National Insurance has been increased by 1% - and is effective from lower earnings levels.  This will also highlight the true difference between the contributions of the relatively well off in comparison with those who are not.  A worker earning £20k a year will be paying a marginal tax rate of 31% (32% in the next tax year) compared with someone earning £50k who will be paying a marginal rate of 41% (42%) - much lower than the headline difference of 20% to 40%.

The main problem with introducing this would be that there are a few differences to when NI is charged compared with Income Tax.

For a start, National Insurance isn't payable by persons who have reached the state pension age - the theory being that they should have already contributed enough to their retirement and health costs.  

National Insurance is also only paid on earned income - whilst Income Tax is in effect on savings and pension incomes.

Different rates of National Insurance are present - it has for a long time been a benefit to be self employed due to the 3% tax saving you make due to a lower rate of National Insurance at the basic rate.

These problems can be addressed by applying different tax rates to different types of income - it may also be welcome to be increasing taxes certain unearned income.  Opponents will portray this as a tax rise (people will see 20% leaping to 32%) but in reality by implementing this and following the current plans for the personal allowance it will actually be a small tax cut for those paying at the basic rate.  If George Osbourne does introduce this and takes account all of the complications then I will actually have some words of praise for him rather than just indifference.

1 comment:

  1. I have just come across this excellent link that develops the point on how crazy the system is: