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
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: Experienced Recruitment Consultant

    £20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...

    Recruitment Genius: Collections Agent

    £14000 - £16000 per annum: Recruitment Genius: This company was established in...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...

    Day In a Page

    Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

    How Isis profits from destruction of antiquities

    Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
    Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

    'If we lose touch we’ll end up with two decades of the Tories'

    In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
    Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

    The Arab Spring reversed

    Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
    King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

    Academic claims King Arthur was real - and reveals where he lived

    Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
    Who is Oliver Bonas and how has he captured middle-class hearts?

    Who is Oliver Bonas?

    It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
    Earth has 'lost more than half its trees' since humans first started cutting them down

    Axe-wielding Man fells half the world’s trees – leaving us just 422 each

    However, the number of trees may be eight times higher than previously thought
    60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

    60 years of Scalextric

    Model cars are now stuffed with as much tech as real ones
    Theme parks continue to draw in thrill-seekers despite the risks - so why are we so addicted?

    Why are we addicted to theme parks?

    Now that Banksy has unveiled his own dystopian version, Christopher Beanland considers the ups and downs of our endless quest for amusement
    Tourism in Iran: The country will soon be opening up again after years of isolation

    Iran is opening up again to tourists

    After years of isolation, Iran is reopening its embassies abroad. Soon, there'll be the chance for the adventurous to holiday there
    10 best PS4 games

    10 best PS4 games

    Can’t wait for the new round of blockbusters due out this autumn? We played through last year’s offering
    Transfer window: Ten things we learnt

    Ten things we learnt from the transfer window

    Record-breaking spending shows FFP restraint no longer applies
    Migrant crisis: UN official Philippe Douste-Blazy reveals the harrowing sights he encountered among refugees arriving on Lampedusa

    ‘Can we really just turn away?’

    Dead bodies, men drowning, women miscarrying – a senior UN figure on the horrors he has witnessed among migrants arriving on Lampedusa, and urges politicians not to underestimate our caring nature
    Nine of Syria and Iraq's 10 world heritage sites are in danger as Isis ravages centuries of history

    Nine of Syria and Iraq's 10 world heritage sites are in danger...

    ... and not just because of Isis vandalism
    Girl on a Plane: An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack

    Girl on a Plane

    An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack
    Why Frederick Forsyth's spying days could spell disaster for today's journalists

    Why Frederick Forsyth's spying days could spell disaster for today's journalists

    The author of 'The Day of the Jackal' has revealed he spied for MI6 while a foreign correspondent