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What lies ahead for tax and NI

The days when National Insurance only funded a welfare safety net seem long gone as it increasingly supports the NHS and state pension, but what of its future? Peter Allen explores the options.

The national insurance (NI) system started out, as its name suggests, as insurance for working people, but it has over the years morphed into a tax that doesn't fit neatly into the wider tax system. National insurance contributions (NIC) have a set purpose dictated by legislation, but we need to ask whether they are being used for this purpose. NIC coexists with other taxes, with which it interacts in such a way as to be a major consideration in many areas of tax planning. Finally, NIC on the face of it appears to be so similar to income tax it looks like we have two similar taxes being applied to the same types of income.

The government is now looking at this area with fresh eyes and a willingness to refine the system. The Tax Faculty has been analysing what should become of NI and in our opinion there is more than one possible future for it, other than just merging it with income tax.

How did we get here?

NI was introduced in 1911, two years after the introduction of the state pension, making the previous voluntary system of worker cover with friendly societies mandatory. The combined compulsory payments by employees, employers and government went into a fund with the aim of purchasing financial cover for periods when the individual could not work, whether because of unemployment, ill-health or certain other reasons. Since that time the system has been refined and expanded, especially since it was effectively nationalised in 1948.

This is an extract from an article in the September 2015 edition of TAXline, the magazine of the Tax Faculty.

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