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Budget 2011: income tax/NIC merger consultation announced

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The Government has announced plans for a consultation to merge national insurance contributions (NIC) into income tax.

In his Budget speech today, George Osborne, the chancellor of the exchequer, said: "We have for decades forced businesses large and small to operate independent NIC and income tax. This is an unnecessary cost and complexity on employers.

"We will consult on merging national insurance and income tax. We are not proposing to extend NIC to pensioners. This will require a great deal of consultation, but will make taxes fit for the modern age."

Shimon Shaw, a solicitor at Matthew, Arnold and Baldwin, told HR magazine: "This will be too huge a step to take for small businesses. It sounds perfect, but in reality, it will be extremely complex.

"Questions will be raised because employees do not pay NIC on their dividends and pensioners don't pay it, so there would have to be a detailed consultation to come up with anti-avoidance measures."

David Ludlow, head of employment at law firm Barlow Robbins, added: "I don't think a merger such as this would have too much of an effect on the relationships between employers and employees from an HR point of view.

"NIC is supposed to fund social security and such like, but in reality it is a straight tax and there will be issues such as golden handshakes and termination payments for departing members of staff that will need to be addressed."

Mike Hayes, a principal at tax advisory business Kingston Smith, believes the biggest challenge for HR staff will be to persuade employees NIC is in essence the same as tax. And he believes it would make the payroll process easier.

"At the moment there are several calculations employers have to go through for pay - tax, NIC, student loan repayments and pensions, for example. This merger would simplify things for them, " he said.