Income tax and NI merger: a fair and honest way to tax

Not content with reforming pensions taxation, the government has taken a step closer to merging income tax and national insurance (NI).

There have already been scare stories that one straight-forward income tax would be a chance for the government to increase taxes by the backdoor, but surely a simplified tax system would be welcome.

Currently most people who are basic rate taxpayers believe they pay 20% tax on their income but they'd be wrong; when NI contributions are factored in that rate is bumped up to 32%. That means almost a third of your pay packet goes to the government before any other taxes like VAT are even factored in.

The Treasury is expected to bring in £170 billion from income tax and £115 billion from NI this year.

But don't feel bad if it's difficult to work out just how much NI you pay, the thresholds aren't aligned to income tax (where the first £10,600 of earnings are tax-free, 20% tax is paid up to £42,385, 40% up to £150,000 and 45% after that). The NI thresholds are in a world of their own and aren't updated as regularly as the income tax ones.
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What does it insure?

As well as being misleading in terms of the tax paid, the other big problem with paying income tax and NI separately is that people think 'national insurance' will actually insure them against something or give them an entitlement to something.

Years ago when NI was introduced it insured you against an old age spent in penury as it guaranteed you a state pension. In the days before people lived 30 years in retirement, NI was used almost as a savings pot for your state pension but not anymore.

Now NI contributions are used in exactly the same way as income tax, the money goes towards paying expenditure today, such as current pensioners' state pensions, not as a buffer for future expenditure.

By merging income tax and NI the idea that there isn't a pot waiting for you in old age built up with your NI contributions may be made more apparent. This is a good thing for younger people who cannot even rely on the state pension being around when they hit to retirement and need to start thinking about their own financial future.

And if you want people to engage with their money, making sure we have a simple taxation system is a good place to start.

Read more:

The end of national insurance?

Surplus to fund income tax cut

A million more will pay higher-rate tax