Osborne's secret plan to raise tax – and scrap national insurance

Radical reform that has been shunned by past chancellors may be taken up by the Coalition

Income tax and national insurance could be merged as part of a drive to simplify the tax system by the Coalition Government.

The move is expected to be signalled by George Osborne in his Budget next Wednesday. Although such a huge change would take years to implement, the Chancellor is determined to be seen as a reformer and not just as the axeman who cleared the budget deficit he inherited from Labour.

The idea has been under discussion for years, but politicians have shied away from implementing it. Such an upheaval would be bound to create winners and losers, and the effective abolition of national insurance – currently at 11 per cent for employees, rising to 12 per cent next month – could be portrayed as a tax hike, taking the basic rate from 20p to 32p and top rate from 40p to 52p in the pound.

Politicians have raised national insurance to avoid putting up income tax. Labour, which had pledged not to raise tax rates, increased national insurance in 2002 to fund a budget boost for the NHS.

The contributory principle, dating back to the introduction of NI in 1911, was another reason for retaining the payments, but this has been eroded over the years and now only six state benefits depend wholly or in part on people's contributions: bereavement allowance, jobseeker's allowance, employment and support allowance, incapacity benefit, maternity allowance and the basic state pension.

Plans by the Work and Pensions Secretary, Iain Duncan Smith, to bring in a flat rate pension of £140 a week, based on residence rather than national insurance payments, would further weaken the principle. So could Mr Duncan Smith's proposal to streamline state benefits for people of working age into a universal credit.

One minister said yesterday: "The changes to benefits could tip the balance in favour of merging tax and national insurance. It would be a radical reform and lasting legacy for the Government. We don't want to be remembered for cuts, cuts and more cuts."

Mr Osborne will call next week's package a "Budget for growth" to answer criticism that the Coalition has a cuts strategy but no programme to create jobs and growth. Ministers have promised to attack the "enemies of enterprise" and cut red tape for business.

The proposed merger would be welcomed by small businesses. A survey of them by the Treasury's Office of Tax Simplification found almost unanimous support for the idea. In its interim report this month, the office said the two parallel systems distort behaviour as people try to limit their tax bills.

Its report admitted that the timescale to introduce such "major structural changes" might be lengthy, and said it would "not be an easy task" to ensure that there was no significant overall loss to the Exchequer or taxpayers. It would cut the time and cost of payroll calculations for employers, make it easier for the self-employed to complete tax forms, and reduce costs at HM Revenue & Customs.

In the current financial year, income tax and national insurance are forecast to raise £250bn – 45 per cent of total tax revenue – of which national insurance contributes £100bn and tax £150bn.

Critics of the tax system have long pointed out the anomalies caused by separate tax and national insurance payments.

A study by the Institute for Fiscal Studies last year said: "The current UK tax system is opaque and unnecessarily complex, imposing two entirely separate taxes on earnings – income tax and national insurance contributions. Recent changes have introduced a bizarre marginal rate structure, with marginal income tax rates rising from 40 per cent to 60 per cent on incomes between £100,000 and £112,950, then falling back to 40 per cent before rising again to 50 per cent."

Before last year's election, Labour announced that next month's 1 per cent rise would apply to both employees and employers, whose current rate is 12.8 per cent, to cut the deficit. The Coalition scrapped the rise for employers, instead raising VAT from 17.5 to 20 per cent, but retained it for employees.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Financial Adviser

    £20000 - £60000 per annum: Recruitment Genius: Are you recently QCA Level 4 qu...

    SThree: Graduate Recruitment Resourcer

    £20000 - £22500 per annum + OTE £30K: SThree: SThree Group have been well esta...

    Guru Careers: Application Support Analyst / 1st Line Support

    £25 - 30k: Guru Careers: We are seeking an Application Support Analyst / 1st L...

    Guru Careers: .NET Developer / Web Developer

    £45K - £55K (DOE) + Benefits: Guru Careers: We are seeking a full stack .NET D...

    Day In a Page

    Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

    Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

    How a costume drama became a Sunday night staple
    Miliband promises no stamp duty for first-time buyers as he pushes Tories on housing

    Miliband promises no stamp duty for first-time buyers

    Labour leader pushes Tories on housing
    Aviation history is littered with grand failures - from the the Bristol Brabazon to Concorde - but what went wrong with the SuperJumbo?

    Aviation history is littered with grand failures

    But what went wrong with the SuperJumbo?
    Fear of Putin, Islamists and immigration is giving rise to a new generation of Soviet-style 'iron curtains' right across Europe

    Fortress Europe?

    Fear of Putin, Islamists and immigration is giving rise to a new generation of 'iron curtains'
    Never mind what you're wearing, it's what you're reclining on

    Never mind what you're wearing

    It's what you're reclining on that matters
    General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

    Chuka Umunna: A virus of racism runs through Ukip

    The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
    Yemen crisis: This exotic war will soon become Europe's problem

    Yemen's exotic war will soon affect Europe

    Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
    Marginal Streets project aims to document voters in the run-up to the General Election

    Marginal Streets project documents voters

    Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
    Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

    The real-life kingdom of Westeros

    Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
    How to survive a social-media mauling, by the tough women of Twitter

    How to survive a Twitter mauling

    Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
    Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

    At dawn, the young remember the young

    A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
    Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

    Follow the money as never before

    Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
    Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

    Samuel West interview

    The actor and director on austerity, unionisation, and not mentioning his famous parents
    General Election 2015: Imagine if the leading political parties were fashion labels

    Imagine if the leading political parties were fashion labels

    Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
    Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

    Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

    The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence