Gary Collins, Tax Partner at Mazars, the international accountancy firm, shares his thoughts on the future of National Insurance.
It has been almost a year since the then Chancellor, George Osborne, announced a change in National Insurance contributions.
The new ruling meant that National Insurance contributions were calculated to consolidate the state pension into a so-called “single tier”. This was a new, simpler State Pension that should have made planning for retirement easier. The Treasury said the change to the rules would bring in an extra £5.5 bn a year. Yet, what this has meant in reality is that affected employees, those who were members of contracted out schemes, took a hit of 1.4 per cent on their earnings, while employers had to pay an extra 3.4 per cent in contributions.
As ever, the new regulations do not take the different circumstances of individual employees into account. Those with “portfolio careers” (who work in multiple part-time jobs, including part-time or temporary employment, freelancing and self-employment) seem to have been overlooked. Indeed, HMRC has always had difficulty in understanding this category of the population. It has been far simpler for HMRC to fit people into an “employment” box, which overlooks the benefits of self-employment or freelancing. With this in mind, the different classes of National Insurance contributions need simplifying.
Going back to Osborne, one of his big ideas as Chancellor was to try to merge National Insurance with Income Tax. This, however, seems to have fallen by the wayside. Not surprising, perhaps, as National Insurance is a huge revenue stream for HMRC. Given the current political turmoil the Government is unlikely to take on fresh challenges by resurrecting the idea.
But that was then, and this is now. Who could have predicted the seismic shift in the political landscape over the last 12 months, or what it would mean for the future of National Insurance contributions for businesses?
As the Government has now committed to further austerity measures it is unlikely that regulation around National Insurance will loosen. On the contrary, I think we are set to see more policing and enforcement as the Treasury tries to cut down on borrowing and maximise revenues.
If National Insurance is to stay, it needs to be simplified. The different classes of contributions are mystifying and need clarification. An alignment with Income Tax is needed to make the system seem fairer, and the burden of red tape should be cut away. Only then will businesses continue to have confidence in a system which has been treated with ever-increasing caution by small businesses and the self-employed for some years now.