MSB Accounting Limited

What's the latest?

HMRC and the Treasury have now closed their call for evidence on the potential merger of income tax and national insurance contributions.

Chancellor George Osborne first signalled the government's plans to reform the two taxes in this year's budget speech, as part of a drive to simplify taxation for business by reducing bureaucracy and cutting costs.

The consultation, which closed on 19 September, included 14 questions. The first three questions were aimed at everyone while the remainder targetted HR professionals and employers and were designed to gain more detail about the financial and administrative burdens involved in operating the two systems.

There is a great deal of uncertainty regarding how the integration of income tax and the NIC system would work in practice. The Chancellor himself acknowledged that it was a 'huge task', which would require 'a great deal of consultation and take a number of years to complete.'

The evidence from this consultation forms part of the preliminary stages and responses will be considered within the government's proposals for change.

Watch this space for further updates.

How does the current system work?

Income tax is your contribution to government spending on things like transport, health and education. How much you pay depends on how much you earn. HMRC gives you a tax code (indicated on your payslip). Your employer uses your tax code to work out how much Income Tax to deduct from your wages through the PAYE system.

National Insurance is essentially an extra income tax. You pay national insurance contributions (NIC) to build up your entitlement to a State Pension and other social security benefits. How much you pay depends on how much you earn. If you earn over a certain amount, your employer deducts Class 1 NIC from your wages through the PAYE system.

Your employer also pays employer NIC based on your earnings and on any related benefits. HMRC tracks your contributions through your National Insurance number.

See the HMRC website for current NIC and income tax rates.

Submitted by MSB Accounting on Wednesday 5th October 2011