Some years ago I was involved, in a minor way, in the writing of a Government report on the merging of PAYE and National Insurance. If my memory serves, the report highlighted 5 major (i.e. politically sensitive) hurdles to the merger of these two “taxes”.
Subsequent Governments have tackled some of these, including aligning the lower thresholds for income tax and NI, and charging Class 1A NIC on benefits in kind. However, perhaps the most politically sensitive point still remains - if income tax and NI are actually merged that would give a headline percentage for basic rate tax of 33%. This would fall to 31% from next April, but it doesn’t sound as good as 20% does it?
Although a true merger may still not be on the cards, the alignment of the two taxes continues. The change for 2008 onwards is a substantial increase in the upper earnings limit for NI. This is the maximum level of income on which you pay the full rate of employee NI – any earnings above that limit attract only a 1% charge.
The upper earnings limit will rise from £34,840 to £40,040 from April 2008. This means that you will pay 11% on an extra £5,200 rather than the 1% payable this year – an increase of £520.
The level at which the 40% higher rate of income tax will apply for 2008/09 has not yet been announced, but is expected also to be £40,040, thus aligning both the lower and upper limits for tax and NI. This extension of the basic rate band, together with the proposed reductions in the basic rate from 22% to 20%, should more than compensate for the extra NI. However, for those people who have the choice, the message is still clear - take income in the form of dividends rather than salary whenever possible and avoid the additional NI.
