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
Sport
wimbledonScot will face Ivo Karlovic next
Sport
football
News
Hillary Clinton comments on viral Humans of New York photo of gay teenager
Arts and Entertainment
The gang rape scene in the Royal Opera’s production of Gioachino Rossini’s Guillaume Tell has caused huge controversy
music
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?
Independent Dating
and  

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

iJobs Job Widget
iJobs General

Recruitment Genius: Sales Administrator - Spanish Speaking

£17000 - £21000 per annum: Recruitment Genius: This is a fantastic opportunity...

Recruitment Genius: Sales Administrator - German Speaking

£17000 - £23000 per annum: Recruitment Genius: This is a fantastic opportunity...

Recruitment Genius: Sales Administrator - Japanese Speaking

£17000 - £23000 per annum: Recruitment Genius: If you are fluent in Japanese a...

Recruitment Genius: Graphic Designer - Immediate Start

£16000 - £25000 per annum: Recruitment Genius: This is a fantastic opportunity...

Day In a Page

Is this the future of flying: battery-powered planes made of plastic, and without flight decks?

Is this the future of flying?

Battery-powered planes made of plastic, and without flight decks
Isis are barbarians – but the Caliphate is a dream at the heart of all Muslim traditions

Isis are barbarians

but the Caliphate is an ancient Muslim ideal
The Brink's-Mat curse strikes again: three tons of stolen gold that brought only grief

Curse of Brink's Mat strikes again

Death of John 'Goldfinger' Palmer the latest killing related to 1983 heist
Greece debt crisis: 'The ministers talk to us about miracles' – why Greeks are cynical ahead of the bailout referendum

'The ministers talk to us about miracles'

Why Greeks are cynical ahead of the bailout referendum
Call of the wild: How science is learning to decode the way animals communicate

Call of the wild

How science is learning to decode the way animals communicate
Greece debt crisis: What happened to democracy when it’s a case of 'Vote Yes or else'?

'The economic collapse has happened. What is at risk now is democracy...'

If it doesn’t work in Europe, how is it supposed to work in India or the Middle East, asks Robert Fisk
The science of swearing: What lies behind the use of four-letter words?

The science of swearing

What lies behind the use of four-letter words?
The Real Stories of Migrant Britain: Clive fled from Zimbabwe - now it won't have him back

The Real Stories of Migrant Britain

Clive fled from Zimbabwe - now it won’t have him back
Africa on the menu: Three foodie friends want to popularise dishes from the continent

Africa on the menu

Three foodie friends want to popularise dishes from the hot new continent
Donna Karan is stepping down after 30 years - so who will fill the DKNY creator's boots?

Who will fill Donna Karan's boots?

The designer is stepping down as Chief Designer of DKNY after 30 years. Alexander Fury looks back at the career of 'America's Chanel'
10 best statement lightbulbs

10 best statement lightbulbs

Dare to bare with some out-of-the-ordinary illumination
Wimbledon 2015: Heather Watson - 'I had Serena's poster on my wall – now I'm playing her'

Heather Watson: 'I had Serena's poster on my wall – now I'm playing her'

Briton pumped up for dream meeting with world No 1
Wimbledon 2015: Nick Bollettieri - It's time for big John Isner to produce the goods to go with his thumping serve

Nick Bollettieri's Wimbledon Files

It's time for big John Isner to produce the goods to go with his thumping serve
Dustin Brown: Who is the tennis player who knocked Rafael Nadal out of Wimbeldon 2015?

Dustin Brown

Who is the German player that knocked Nadal out of Wimbeldon 2015?
Ashes 2015: Damien Martyn - 'England are fired up again, just like in 2005...'

Damien Martyn: 'England are fired up again, just like in 2005...'

Australian veteran of that Ashes series, believes the hosts' may become unstoppable if they win the first Test