Earlier this year the OTS presented a report to government ministers on aligning the intake of national insurance with income tax. The report detailed a seven-step plan. The main highlights of the report were:
Employee NICs to be calculated on a cumulative basis like PAYE
Tax rates and thresholds would be aligned for income tax and NICs.
In order to correctly calculate the amount of NICs to pay, HMRC would need to issue employees an NIC code and operate this in a similar manner to the current tax code system.
Eradicate employer NICs
Employer NICs would be removed and replaced with a payroll levy that charges a simple percentage to the entire payroll total.
Employers would miss out on individual thresholds currently applied to individual employees and the OTS admits this would require further thought but highlights the administrative benefits.
Due to the effect of combining all incomes before calculating NIC deductions, any person with more than one job and earning over £20,000 will likely pay more than they currently do. OTS estimates put 5.5 million worse off, but show that 7.6 million would be better off.
The report stops short of merging the two pay deductions, acknowledging that it would be ultimately simpler to do so but the government has requested to keep them separate due to the differing purposes of each. An implementation plan spread over five years has been proposed.
Industry analysts have welcomed the simplicity and benefits of the plan but urge the government to make sure no one is worse off as a result of any changes before green lighting updates to the system.
We may have more light shed upon the matter of merging tax and national insurance in next week's 2016 Autumn Statement.