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.

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
ebooks
ebooksAn introduction to the ground rules of British democracy
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.

iJobs Job Widget
iJobs General

Recruitment Genius: Office / Sales Manager

£22000 - £32000 per annum: Recruitment Genius: Established and expanding South...

Recruitment Genius: Administrative Assistant / Order Fulfilment

£14000 per annum: Recruitment Genius: An exciting opportunity to join a thrivi...

SThree: Trainee Recruitment Consultant

£18000 - £23000 per annum + Uncapped OTE: SThree: Trainee Recruitment Consulta...

SThree: Trainee Recruitment Consultant

£18000 - £23000 per annum + Uncapped OTE: SThree: Trainee Recruitment Consulta...

Day In a Page

Refugee crisis: David Cameron lowered the flag for the dead king of Saudi Arabia - will he do the same honour for little Aylan Kurdi?

Cameron lowered the flag for the dead king of Saudi Arabia...

But will he do the same honour for little Aylan Kurdi, asks Robert Fisk
Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

Humanity must be at the heart of politics, says Jeremy Corbyn
Joe Biden's 'tease tour': Could the US Vice-President be testing the water for a presidential run?

Joe Biden's 'tease tour'

Could the US Vice-President be testing the water for a presidential run?
Britain's 24-hour culture: With the 'leisured society' a distant dream we're working longer and less regular hours than ever

Britain's 24-hour culture

With the 'leisured society' a distant dream we're working longer and less regular hours than ever
Diplomacy board game: Treachery is the way to win - which makes it just like the real thing

The addictive nature of Diplomacy

Bullying, betrayal, aggression – it may be just a board game, but the family that plays Diplomacy may never look at each other in the same way again
Lady Chatterley's Lover: Racy underwear for fans of DH Lawrence's equally racy tome

Fashion: Ooh, Lady Chatterley!

Take inspiration from DH Lawrence's racy tome with equally racy underwear
8 best children's clocks

Tick-tock: 8 best children's clocks

Whether you’re teaching them to tell the time or putting the finishing touches to a nursery, there’s a ticker for that
Charlie Austin: Queens Park Rangers striker says ‘If the move is not right, I’m not going’

Charlie Austin: ‘If the move is not right, I’m not going’

After hitting 18 goals in the Premier League last season, the QPR striker was the great non-deal of transfer deadline day. But he says he'd preferred another shot at promotion
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