Tax and National Insurance Merger Stealth Tax

Tax and National Insurance Merger Stealth Tax.

Reports circulating last week suggest that the Chancellor George Osborne has put the merger of income tax and national insurance contributions back on the horizon.  The Chancellor has made various claims over the last year or so as to the benefits and many speculators have tried to second guess the impact.  So here is our view as to what could happen and why?

What we know?  Nothing, apart from what the Chancellor has suggested this move in pre-budget speeches.

What are the current rates?

Income Tax

• Basic Rate 20% tax on taxable income below £31,865
• Higher Rate 40% tax on taxable income in excess of £31,865
• Additional Rate 45% tax on taxable income above £150,000

National Insurance Contributions

Employee Payment Rates

• Weekly Earnings - £1 to £153 Rate = Nil
• Weekly Earnings - £153.01 to £805 Rate = 12%
• Weekly Earnings - Excess over £805 Rate = 2%

Employer Rates For Employee Pay

• Weekly Earnings - £1 to £153 Rate = Nil
• Weekly Earnings - Excess over £153 Rate = 13.8%

What are the speculators suggesting?

• No employee national insurance contributions
• Income tax rates to rise to 32%, 42% and 57% respectively.

Our view

All speculation and no guesses as to what happens to employers national insurance and tax rates on trusts?

Does this mean pensioners will pay higher tax, when currently they do not pay national insurance contributions?  Yes, we suggest it will. 

In short, more taxes for an ageing population?  Government spin suggests that a reduced tax rate could apply to pensioners, we suggest not but a vote winning increased personal allowance maybe.

£20,000 Salary

Today, would mean deductions of: National Insurance Contributions £1,445.28.  Income Tax payable = £2,000.  Total deductions: £3,445.28.  Total net tax home pay £16,554.72.

Under above possible changes:  National Insurance Contributions NIL.  Income Tax payable = £3,200.  Total deductions: £3,200.  Total net tax home pay £16,800.

£50,000 Salary

Today, would mean deductions of: National Insurance Contributions £4,231.28.  Income Tax payable = £9,627.  Total deductions: £13,858.28.  Total net tax home pay £36,141.72.

Under above possible changes:  National Insurance Contributions NIL.  Income Tax payable = £14,427.  Total deductions: £14,427.  Total net tax home pay £35,573.

Changes such as the above could simplify things, but it is clear that anyone earning more than around £25,000 will pay more under any new regime.  This stealth tax will only benefit lower earners in the longer term and the majority of general workers and middle Britain will pay significantly more with a tax and national insurance merger.

What about employers?  We suggest a reduction on national insurance but an increase in forced contributions to the new Auto enrolment work place pensions.