Radical Tory tax plan spells the end of national insurance

Fears that tax merger is attack on the NHS

Income tax and national insurance could be merged by a future Conservative government under plans to simplify the tax system through its biggest shake-up for decades.

Chancellor George Osborne came close to approving the dramatic move in this year’s Budget, but backed off because of problems integrating computer systems, The Independent can disclose. Senior Tories believe the change – which is being actively considered by party chiefs – would make it clearer to taxpayers how much of their earnings they are handing over to the state.

Plans to press ahead with the reform are among those being examined for inclusion in next year’s Tory general election manifesto. One suggestion is that the merged charge could be called an “earnings tax”.

The move would mean basic-rate taxpayers handing over 32 per cent of their earnings and higher-rate taxpayers returning 52 per cent. Employers’ NI contributions are likely to remain unchanged under the plan.

The system of national insurance contributions dates back to 1911 when it was established to help working people insure against illness and unemployment. It was expanded after the Second World War to help fund the health service and wider social security programmes, and is now charged at 12p for every pound of income.

Video: George Osborne reveals Budget 2014

It has grown up in parallel with income tax, which traces its roots to the 18th century and is administered separately.

But senior Conservatives believe the distinction has become academic, particularly as general taxation is routinely used to meet the cost of the NHS. Mr Osborne almost approved the merger of the two forms of taxation this year, a source revealed. “We came within a whisker of doing this at the last Budget, but in the end we decided against it,” he said. “They are currently on two separate computer systems and we thought the risk was just too great. But it’s something we could do in the future in the next parliament.”

The source acknowledged fears that pensioners, who do not pay national insurance, could view the reform as a covert way of making them pay the charge.

“Some people think it is a cynical attempt by politicians to ensure they keep paying national insurance, but it isn’t,” he said.

However, a Labour member of the Commons Treasury Select Committee, John Mann, was fiercely critical of the proposal. “It would be disastrous. People understand national insurance is covering social welfare, not least the NHS,” he said. “Merging it with tax would be a long-term way of undermining the NHS. It’s the sort of thing the Tea Party would come up with in the United States.”

Tax experts have previously warned that while the concept of a single levy would be attractive, disentangling two separate payments with different rules would create practical problems. But Mr Osborne has been sympathetic to the principle of the reform since his arrival at the Treasury, and supporters of the move believe the problem of incompatible computer systems could be overcome in time.

In a consultation paper three years ago, the Treasury said the parallel taxes created bureaucracy and added costs for employers.

It argued: “We believe greater integration of the two systems has the potential to remove economic distortions, reduce burdens on business, and improve fairness across individual earners.”

In a survey in 2011, the Office of Tax Simplification, which is part of the Treasury, found almost unanimous  support for the idea.

It warned it would take many years to introduce such “major structural changes”, but stressed the savings for employers, the self-employed and HM Revenue and Customs. The Institute for Fiscal Studies has also described the tax system as “opaque and unnecessarily complex, imposing two entirely separate taxes on earnings”. The two charges raised £254bn last year, comprising £152bn from income tax and £102bn from NI contributions.

Previous Chancellors have balked at merging the systems, not just because of the problem of how to protect the elderly from paying NI contributions on their pensions, but also due to the issue of tax on savings accounts and dividends, which are both exempt from NI.

News
people'It can last and it's terrifying'
Sport
Danny Welbeck's Manchester United future is in doubt
footballGunners confirm signing from Manchester United
Sport
footballStriker has moved on loan for the remainder of the season
Sport
footballFeaturing Bart Simpson
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
News
ebooksAn unforgettable anthology of contemporary reportage
News
Katie Hopkins appearing on 'This Morning' after she purposefully put on 4 stone.
peopleKatie Hopkins breaks down in tears over weight gain challenge
News
Ricky Gervais performs stand-up
people
Arts and Entertainment
Olivia Colman topped the list of the 30 most influential females in broadcasting
tv
News
Kelly Brook
peopleA spokesperson said the support group was 'extremely disappointed'
Life and Style
techIf those brochure kitchens look a little too perfect to be true, well, that’s probably because they are
Sport
Andy Murray celebrates a shot while playing Jo-Wilfried Tsonga
TennisWin sets up blockbuster US Open quarter-final against Djokovic
Arts and Entertainment
Hare’s a riddle: Kit Williams with the treasure linked to Masquerade
booksRiddling trilogy could net you $3m
Arts and Entertainment
Alex Kapranos of Franz Ferdinand performs live
music Pro-independence show to take place four days before vote
News
news Video - hailed as 'most original' since Benedict Cumberbatch's
News
i100
Life and Style
The longer David Sedaris had his Fitbit, the further afield his walks took him through the West Sussex countryside
lifeDavid Sedaris: What I learnt from my fitness tracker about the world
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.

iJobs Job Widget
iJobs General

Planning Manager (Training, Learning and Development) - London

£35000 - £38000 per annum + benefits: Ashdown Group: A highly successful, glob...

SEN Teaching Assistant

£50 - £70 per day: Randstad Education Chelmsford: Are you a Teaching Assistant...

Year 5 Teacher

Negotiable: Randstad Education Plymouth: Randstad Education Ltd are seeking KS...

Year 6 Teacher

Negotiable: Randstad Education Plymouth: Randstad Education Ltd are seeking KS...

Day In a Page

'I’ll tell you what I would not serve - lamb and potatoes': US ambassador hits out at stodgy British food served at diplomatic dinners

'I’ll tell you what I would not serve - lamb and potatoes'

US ambassador hits out at stodgy British food
Radio Times female powerlist: A 'revolution' in TV gender roles

A 'revolution' in TV gender roles

Inside the Radio Times female powerlist
Endgame: James Frey's literary treasure hunt

James Frey's literary treasure hunt

Riddling trilogy could net you $3m
Fitbit: Because the tingle feels so good

Fitbit: Because the tingle feels so good

What David Sedaris learnt about the world from his fitness tracker
Saudis risk new Muslim division with proposal to move Mohamed’s tomb

Saudis risk new Muslim division with proposal to move Mohamed’s tomb

Second-holiest site in Islam attracts millions of pilgrims each year
Alexander Fury: The designer names to look for at fashion week this season

The big names to look for this fashion week

This week, designers begin to show their spring 2015 collections in New York
Will Self: 'I like Orwell's writing as much as the next talented mediocrity'

'I like Orwell's writing as much as the next talented mediocrity'

Will Self takes aim at Orwell's rules for writing plain English
Meet Afghanistan's middle-class paint-ballers

Meet Afghanistan's middle-class paint-ballers

Toy guns proving a popular diversion in a country flooded with the real thing
Al Pacino wows Venice

Al Pacino wows Venice

Ham among the brilliance as actor premieres two films at festival
Neil Lawson Baker interview: ‘I’ve gained so much from art. It’s only right to give something back’.

Neil Lawson Baker interview

‘I’ve gained so much from art. It’s only right to give something back’.
The other Mugabe who is lining up for the Zimbabwean presidency

The other Mugabe who is lining up for the Zimbabwean presidency

Wife of President Robert Mugabe appears to have her sights set on succeeding her husband
The model of a gadget launch: Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed

The model for a gadget launch

Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed
Alice Roberts: She's done pretty well, for a boffin without a beard

She's done pretty well, for a boffin without a beard

Alice Roberts talks about her new book on evolution - and why her early TV work drew flak from (mostly male) colleagues
Get well soon, Joan Rivers - an inspiration, whether she likes it or not

Get well soon, Joan Rivers

She is awful. But she's also wonderful, not in spite of but because of the fact she's forever saying appalling things, argues Ellen E Jones
Doctor Who Into the Dalek review: A classic sci-fi adventure with all the spectacle of a blockbuster

A fresh take on an old foe

Doctor Who Into the Dalek more than compensated for last week's nonsensical offering