On Monday 14 November 2016 the Office of Tax Simplification (OTS) published its second report on the alignment of National Insurance Contributions (NIC) with income tax.

The OTS had been tasked by the government to undertake an investigation into whether the NIC system could be simplified in order to create both a simpler and a fairer system that supported modern working patterns.

The OTS has confirmed that its latest report builds on the first report published in March 2016 and sets out the case for NIC reform, with an indicative five year timetable.

Its key findings were that:

  • it is widely acknowledged that national insurance is out of date. It no longer supports modern working patterns, and creates unfair outcomes between taxpayers
  • it is complex to administer, and this makes it difficult for taxpayers to understand how much they should pay and the impact it has on their entitlement to benefits
  • a simpler, and fairer, system would treat everyone’s earnings in the same way, for both income tax and national insurance. This means that national insurance would be calculated in the same way as income tax, making it easier to understand
  • this could change the amount some people pay, but would not raise taxes overall
  • there is widespread support for the reform proposals.

John Whiting, Tax Director, said: “We found near-universal support for reform” but he added that “the impact of change will be considerable: millions of people would pay more in NIC but millions would also pay less. Some paying more would gain contributory benefits but all these impacts need to be carefully worked through and thought about. More work is needed and so is a proper, informed debate about the considerable implications.”

Employers can expect significant changes in the way they will need to calculate and administer national insurance in the future and reform may result in significant changes in the amount of NIC some employees pay. Therefore it will be important to pay close attention to more detailed proposals as they develop.

Ultimately however we may see significant savings in administrative time for payroll functions and more clarity in terms of how national insurance will be applied.