Income tax/NI merger unlikely to happen for several years

Although the government has started considering merging NI and Income Tax, it is unlikely that we will such a merger for many years.

There are various obstacles to the simplification of the two systems, and one of the obvious ones concerns the contributory nature of pensions. As long as pension entitlement is based on earnings, National Insurance will continue to exist and this could mean complexity rather than simplicity.

However, one problem that could be addressed by a simplification of the system is the onerous IR35.

At the moment, employed people pay more NI than their self-employed counterparts and businesses have to pay employers National Insurance contributions if their employees earn in excess of around £7,000.

Anyone with a limited company can avoid paying NI by drawing a low salary and taking the balance in dividends. If an individual runs a micro business through a limited company, HMRC looks for evidence of an employer/employee relationship under IR35 regulations. If found, the Revenue would class the company owner as an employee and as such he would have to pay an employee’s NIC and an employer’s contribution.

One possible solution to the problem would be to tax the individual, rather than the company, on any profits. National Insurance contributions could be aligned so that everyone pays the same, regardless of whether they are employed or self-employed and by abolishing the “Small Profit” rate of corporation tax, all companies would be on an equal footing and people would have less incentive to set up a company simply for NI/tax reasons.

IR35 has been the bane of contractor accountants since its inception, but would the above scenario act be an acceptable solution?

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