Osborne plan to merge national insurance and income tax

Chancellor confident that computer difficulties can be overcome to create single earnings tax

INCOME tax and national insurance could be merged, under one of the biggest shake-ups of the tax system for decades.

George Osborne, the Chancellor, has commissioned a study into reforms which could lead to the creation of a single “earnings tax”.

The system of national insurance contributions dates to 1911 when it was established to help working people insure against illness and unemployment.

It was expanded after the Second World War to fund the health service and wider social security programmes, and is now charged at 12p for every pound of income.

It has developed in parallel with income tax, but senior Conservatives believe that the distinction has become increasingly academic as general taxation also funds the NHS.

Mr Osborne reportedly considered merging the two taxes in the final Budget of the last parliament, but decided not to amid concerns about problems linking the two IT systems.

In a consultation paper three years ago, the Treasury said the parallel taxes created bureaucracy and added costs for employers.

It argued: “We believe greater integration of the two systems has the potential to remove economic distortions, reduce burdens on business and improve fairness across individual earners.” In a survey in 2011, the Office of Tax Simplification (OTS), which is part of the Treasury, found almost unanimous support for the idea.

After the Budget this month, David Gauke, Financial Secretary to the Treasury, wrote to the OTS requesting the review.

He said: “This is an area often cited as a major source of complexity for taxpayers.

“I would like the OTS to look at what the impacts, costs and benefits of closer alignment would be and to set out what the necessary steps would be to achieve closer alignment.”

The OTS will publish its report before the Budget next year.

National insurance makes billions of pounds every year for the Treasury. Anyone who is employed and earns between £112 and £815 a week pays 12 per cent of their income in national insurance. A further 2 per cent is paid on all earnings over that level.

People who are self-employed pay national insurance at a flat rate or as a percentage of the individual’s annual taxable profit.

Tax experts have warned previously that while the concept of a single levy would be attractive, disentangling two separate payments with different rules would create practical problems.

But Mr Osborne has been sympathetic to the principle of the reform since his arrival at the Treasury, and supporters of the move believe the problem of incompatible computer systems could be overcome in time.

Previous chancellors have balked at merging the systems, not least because of the problem of how to protect the elderly from paying national insurance contributions on their pensions.