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Government aiming to align income tax with National Insurance contributions

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Chancellor George Osborne said the government “remains concerned” about the growth of salary sacrifice arrangements

The government has commissioned the Office of Tax Simplification to investigate the potential for aligning income tax with National Insurance contributions (NICs).

Income tax is paid on some earnings, and on benefits offered by employers. It is calculated based on annual income. National Insurance contributions build entitlement to certain state benefits, such as the State Pension, and are calculated on each paycheque. The government aims to gather examples of complexities generated by the current system in order to streamline it.

This announcement follows the Autumn Statement, in which chancellor George Osborne said that the government “remains concerned” about the growth of salary sacrifice arrangements and is considering what action – if any – is necessary.

Salary sacrifice schemes reduce an employee’s pay in exchange for another benefit such as childcare vouchers or increased pension contributions and a saving in NIC. The employer also benefits from reduced NIC.

Nathan Long, head of corporate pension research for Hargreaves Lansdown, said that nobody would willingly choose the complexity that comes from a separate tax and NI system, but it might prove even more complicated to change. “With a multitude of different tax rates for different benefits and quirks within the system it looks like things could get awfully complex, time-consuming, and costly to make any meaningful changes,” he said.

“Tweaks to salary sacrifice in particular risk undermining employer support for auto-enrolment. As well as being more tax efficient for employees, many businesses introduced salary sacrifice to offset their increased cost of workplace pension contributions.”

John Harding, employment tax partner at PwC, said that organisations must be aware of increased scrutiny on salary sacrifice schemes. “Used correctly they are a benefit to both the employer and the employee,” he said. “While it is unlikely that HMRC would outlaw salary sacrifice, employers should be aware of its increasing interest and ensure they have been implementing salary sacrifice arrangements correctly in light of HMRC's increased focus in this area.”

The government is calling for those affected by the current system to share their views in an online survey, and to suggest what could be done to simplify the processes in future.