Partner Article

NIC and PAYE still divorced – why?

Why didn’t the Budget harmonise the thresholds for NICs and PAYE, or make them simpler?

The personal tax allowance goes up to £10,000 on 6 April, and then to £10,500 next year. The NIC thresholds for employee and employer will be £7,956 (albeit still in weekly chunks of £153), but they won’t be bumped up to equal the tax allowance, which would undoubtedly help the lower-paid and their employers.

But there’s no prospect of harmonisation any time soon without fundamental reform of the whole system. Why?

Simply put, the NI Fund would lose around £12bn if the NIC threshold was £10,000 next year. That’s about 11% of the total NIC ‘take’ of £110bn, so it’s plainly unaffordable (unless the Chancellor also cuts the state pension to the same extent…).

This coming year, the ‘triple lock’ uplift of the state pension, combined with the new Employment Allowance (up to £2,000 off the NICs bill for most employers) has meant that the NI Fund has to be topped up from taxes with a 5% ‘Treasury supplement’ so that there’s enough money in the NI pot. The idea of simply cutting NI Fund revenues by such a huge amount was never going to be on the table.

NI isn’t income tax: you might think you could recoup a cut at the bottom by an increase in the upper limit, charging 12% instead of 2% on more earnings, but that wouldn’t affect employers, who already pay the 13.8% ‘jobs tax’ on all those high earnings.

And you’d have to recoup the £12bn from a much smaller number of workers, by increasing disproportionately the upper earnings limit, which is linked to the higher rate tax threshold (think 25m small winners, 4m big losers). There are already enough critics of drawing more people into the 40% marginal tax rate.

So you could harmonise at the bottom end only by a massive hike and de-coupling at the top end. Could you re-design the whole system of funding state pensions? Divorcing employer and employee NICs, charging them separately using different rules might then be feasible, and it might enable a merger of PAYE and employee NICs.

But who would want to be the Chancellor known as the inventor of an extra employer tax, all in the name of simplification, that would merely save a few pounds in payroll and PAYE system administration that’s mainly done by computer?

This was posted in Bdaily's Members' News section by Baker Tilly .