Combined Single Earnings Tax

Combined Single Earnings Tax.

As confirmed in the Chancellor's budget, the government has commissioned a study with the Office of Tax Simplification (OTS) to explore the feasibility of merging the income tax and national insurance contribution systems in the United Kingdom with a view to one single tax to make things simpler.

Problems have previously been cited for the merger of the two systems and this is what the OTS have been tasked with.

Under the current system, broadly speaking we pay income tax at 20%, 40% and 45% and national insurance contributions at 12%. However, the national insurance contributions at the 12% rate are capped at 2% for earnings above £815 per week. We believe the move to merge income tax and national insurance contributions to a single earnings tax is all about:

• cutting government costs by merging NI and tax departments meaning jobs will go
• increasing tax revenue overall, for higher rate taxpayers and above

Keeping with this simple, a person earning £50,000 per year would pay national insurance contributions at 12% for earnings up to £42,380 and 2% for the remaining £7620. In addition income tax would be collected at both 20% and 40%. If the government moved to a new system for example where the combined earnings tax could be set at rates of 32% for a basic rate taxpayer and 52% for a higher rate taxpayer this would result in an additional £762 being paid compared to the current system.

This is why we believe the Chancellor is keen to have a single earnings tax system. It is all about increasing the tax burden for middle and higher earners.

In addition, proposals are being put forward to withdraw tax relief on pension contributions but to then make our pension payments when we receive them in later life with the lower or indeed no tax to pay much in the same way as many countries overseas offer such as Spain, the United States and Australia.

The bonus in doing this to pensions would mean that the government significantly improves its tax revenue whilst we are working by not offering tax relief for pension contributions and then when we come to draw our pensions, whilst tax revenue would be lower it means we have more money in our pockets to fund our care in old age. Again, saving the government money by not having to fund as much of our care costs via the NHS and local authorities.

We are an ageing population and any government needs to increase taxes on the younger working population and ensure that the ageing population has built up funds to pay for their care. The Chancellor's budgets over the coming years will be interesting, expect major changes to income taxes.