Income Tax to merge with National Insurance

Roy Smith joins the firm as Director, Financial Planning

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Julia Grimes
Published: 22 Jul 2015 Updated: 03 May 2016

Press reports have today indicated that Chancellor George Osborne is considering merging Income Tax with National Insurance (NI). Gary Smith, Financial Planner at Tilney Bestinvest looks at five potential implications:

1. “Potential reduction in tax liability - the starting rates at which you pay income tax (£10,600) and national insurance (£8,060) are different. Logic would dictate that given the Conservative pledge to increase the personal allowance to £12,500 that this would also have to be the starting rate for any combined income tax / NI rate. This would mean that everyone could earn £4,500 more before paying any NI equivalent. It would also remove the anomaly for those who earn below the personal allowance, but above the lower earnings limit, having to pay NI but no income tax.”

2. “It would enable the government to increase the rate at which people pay higher rate tax to £50,000, whilst reducing the potential loss to the Exchequer. “Under the current system an individual pays 40% income tax and only 2% NI above the basic rate band. So, if they leave the system as it is, the exchequer will be giving up 20% income tax on circa £8,000 of income if they do increase the Basic rate band to say £50k (including personal allowance). However, if the government merge Income Tax and NI, the effective basic rate tax would be 32% and the higher rate 42%. Therefore, if they increase the basic rate band they are only giving up 10% on £8,000.”

3. “The death of pension tax relief? The government has already announced a consultation on the pension tax relief system, and I believe that a merger of Income Tax and NI would likely result in the floated idea of a pension with ISA-like tax treatment. This is because at present, a basic rate taxpayer gets 20% tax relief on pension payments but surely this would increase to 32% under a combined system. It seems illogical to increase tax relief at a time when they are actually trying to reduce the cost to the Exchequer. An equal tax treatment of ISAs and pensions could be a prelude to merging the two, potentially drawing ISAs into some form of life time allowance.”

4. “Would any new rate apply to dividends? We have already seen the introduction of tax on dividends for basic rate taxpayers of 7.5% from April 2016. At present, NI isn't payable on dividends and one could suspect that the government will also seek to increase this rate to reflect the merged rate. Whilst probably below the 32% rate for people with earned income, the additional tax generated could cover the cost of increasing the basic rate band to £50k.”

5. “Pensioners - I believe that this could be easily addressed by having a separate tax rate for pension income, similar to savings rate tax. So a 20% tax on the pension income in the basic rate band and 40% etc. thereafter.”

Three scenarios:

In order to demonstrate the implications of combining Income Tax with National Insurance, Gary Smith sets out three scenarios showing the tax differences should the Conservatives introduce the following pledges by the end of parliament; increase the personal allowance to £12,500 and increase the basic rate band to £50,000 (including the personal allowance). The current tax year rates and allowances for NI have been used for each scenario.

Scenario 1 - individual earning £20k

Current tax rules:

  • No income tax on first £12.5k.
  • 20% income tax on the remaining £7.5k = £1,500.
  • No NI on first £8,060
  • 12% NI on remaining £11,940 = £1,432.8
  • Total tax and NI is £2,932.80

If the tax rates were combined the situation would be:

  • No tax on first £12,500
  • 32% on next £7,500 = £2,400

This individual would pay £532.80 less tax

Scenario 2 - individual earning £50,000

Current tax rules:

  • No income tax on first £12,500
  • 20% income tax on next £37,500 = £7,500
  • No NI on first £8,060
  • 12% NI on next £34,320 = £4,118.40
  • 2% on remaining £7,620 = £152.40
  • Total tax is £11,770.80

If the tax rates were combined the situation would be:

  • No tax on first £12,500
  • 32% on next £37,500 = £12,000

This individual would pay £230 more tax

“So in example 2 the government would be able to increase the personal allowance and basic rate bands to £50,000 and the individual would still pay more tax by combining the rates. This, coupled with a reduction in pension tax relief, is how I suspect they will be able to afford to implement their proposals.

“I also believe that, if they do press ahead with an ISA style pension offering with no initial tax relief and, merge tax and NI, they would have to ban salary sacrifice. This is because individuals would be better off (see following example).”

Scenario 3: Individual earning £30,000 paying 4% of salary into pension (assuming no pension tax relief)

  • No income tax on first £12,500
  • 32% tax on next £17,500 = £5,600
  • Pension contributions = £1,200
  • Net income = £23,200
  • Position with salary sacrifice of £1,200

If the tax rates were combined the situation would be:

  • No tax on first £12,500
  • 32% on next £16,300 = £5,216
  • Net income = £23,584

This individual would be better off by £384 per year

To discuss this issue further, Gary Smith can be reached on 07876 561 422 /


Important information:

The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. This press release does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers.

Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change.

Press contacts:

Roisin Hynes
0207 189 2403
07966 843 699

Matthew Gray
0207 189 2492

About Tilney Bestinvest

Tilney Bestinvest is a leading investment and financial planning firm that builds on a heritage of more than 150 years. We look after more than £9 billion of assets on our clients’ behalf and pride ourselves on offering the very highest levels of professional client service with transparent, competitive pricing across our entire range of solutions.

We offer a range of services for clients whether they would like to have their investments managed by us, require the support of a highly qualified adviser, prefer to make their own investment decisions or want to take more than one approach. We also have a nationwide team of expert financial planners to help clients with all aspects of financial planning, including retirement planning.

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This release was previously published on Tilney Smith & Williamson prior to the launch of Evelyn Partners.