Tax & admin · 22 July 2015

George Osborne looking into “earnings tax” instead of income tax and National Insurance setup

Osborne previously considered the overhaul of the tax system ahead of his 2014 Budget

The chancellor has commissioned a study into reforms which could see the creation of a single “earnings tax”. This could mean the end of income tax and National Insurance as we know them, with the tax system undergoing significant changes.

It wouldn’t be the first time George Osborne has considered the measure – he was mulling the prospect over ahead of his 2014 Budget, but persistent concerns about linking the two IT systems postponed any potential change.

Under the merger, basic rate income tax payers would pay 32 per cent, rather than 20 per cent income tax, while higher rate taxpayers would pay 52 per cent, up from 40 per cent.

There was also concern at the time that, while the move would simplify the tax system, it may indicate that the Conservatives would appear to be increasing taxes – a delicate area ahead of the general election approaching in May 2015.

Financial secretary David Gauke has though recently requested a review into the system. He wrote to the Office of Tax Simplification and said: “This is an area often cited as a major source of complexity for taxpayers.”

“I would like the OTS to look at what the impacts, costs and benefits of closer alignment would be, and set out what the necessary steps would be to achieve closer alignment,” Gauke added.

A report from the OTS’ findings will be published ahead of 2016’s Budget. A consultation paper from three years ago suggested the parallel taxes contributed to bureaucracy and added costs for employers. It said that “greater integration of the two systems has the potential to remove economic distortions, reduce burdens on business, and improve fairness across individual earners”.

National Insurance was established back in 1911 to help insure working people against illness and unemployment. It was then developed further following the Second World War to help fund the health service and wider social security programmes.

Under the current system, anyone employed who earns between £112 and £815 a week pays 12 per cent of their income in National Insurance and a further two per cent is paid on all earnings above that.

Tax experts have previously warned that while the concept of a single levy would be appealing, setting out two separate payments with different rules could prove tricky in terms of practicality.

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Rebecca is a reporter for Business Advice. Prior to this, she worked with a range of tech, advertising, media and digital clients at Propeller PR and did freelance work for The Telegraph.

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