Thursday, March 31, 2011

The secret target of tax / NI merger: the self-employed

The recently-announced plan to combine or harmonise levels of income tax and National Insurance Contributions could see the self-employed hit hard.

The government is moving the State pension system away from the layer cake of basic pension plus additional variable toppings of Graduated Pension, SERPS and S2P and towards a single income benefit for all set at a level that lifts pensioners out of the complicated and negatively-reinforcing savings trap.

But if all get the same benefit, it could be argued, all should pay the same, or at least the same rates. I think we may end with the self-employed paying the same proportion of their income in tax and NIC as employees - possibly also including what is currently the employer's contribution. This might vitally boost the government's flagging finances.

I commented on the stealth tax of NIC back in 2007, and showed how for an employee on basic rate tax the total government swipe was equivalent to a marginal rate of 40%. There is (or was, until the introduction of the 50% tax band) really not much difference between basic and higher rate tax-paying employees.

But there is a distinct advantage for certain categories of fairly highly-paid professionals to be self-employed or work as partners rather than directors. This could change - and what a juicy target those (e.g.) barristers might present!

Potentially, there's a plus for us ordinaries: if this tax-cum-NIC were all income tax, then it would be far more attractive for average earners to make personal pension contributions. Skandia thinks we could see the end of Higher Rate Tax relief on pensions; but I think it possible we could see, in effect, HRT relief for all. That would be radical, and ultimately beneficial. And it would reward the prudent ant above the live-for-today grasshopper.

Or maybe we'll just see an extension of the heavy tax burden to not only barristers, but jobbing plumbers, plasterers and the like, accompanied by more horrid, bullying tax investigations.

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