In theory, it makes perfect sense to merge NI and Income tax. It would make the tax system simpler, and would close down a route by which taxes have been raised on the quiet in the past – increasing Income Tax tends to generate much more heat and light that hiking NI. However, the real world is a just a little bit more complicated. Here are three reasons why merging NI and Income Tax is more difficult – and politically risky – than it sounds:
- It will mean tax hikes for pensioners, unless there is a carve-out to compensate them for losses.
- Some people with more than one part-time job (usually low paid) will also lose out. NI is paid per employment rather than on total income. It will be more difficult to identify and compensate these losers.
- It would require another major government IT project, involving tens of millions of UK taxpayers. No need to worry about any risks there then.
So if I were Chancellor, I’d want to align NI and Income Tax thresholds before proceeding down this route. And I’d think about rebadging NI, branding it explicitly as a tax. Two small simple steps that could help pave the way for one big radical one.