Alignment of PAYE and NICs - No cumulative collection of NICs but consultation on benefits and expenses

25 October 2007

The Government announced at the time of the 2006 Budget that it would review the case for closer alignment of the income tax and NICs systems. The findings of this review were published with the 2007 Pre-Budget Report.

Collecting NICs cumulatively on an annual basis

The review considered the implications for employers, individuals and Government of the common suggestion that NICS should be collected in a similar manner to PAYE tax, by moving it onto an annual basis and collecting it cumulatively. It did not, however, look at merging the two taxes into one, on the basis that current policy dictates that each system serves a different purpose, with NICs providing entitlement to contributory benefits.

The review found that:

Net savings for employers depend on the extent to which they continue to move away from manual processing but are smaller than might have been expected.

Maximum estimated savings are around 4.5% of the costs of operating the payroll taxes by 2012, which is the earliest year by which changes could be introduced. One-off transitional costs of alignment would be around £200 million.

While approximately 5 million people would save an average of £120 per year in NICs, 1 million individuals, including some low earners, would pay up to £550 more NICs per year and the Exchequer costs would be around £340 million per year.

On that basis, the Government has concluded that, on balance, the benefits of administrative alignment do not outweigh the costs.

However, even though the review does not recommend administrative alignment, a number of areas have been identified where improvements to the current systems could be made. As a result, the Government will consult further on:

collecting tax on benefits in kind and expenses through the payroll, and

improving and aligning information and guidance on tax and NICs.

Benefits in Kind and expenses

Forms P11D and P9D returns, used by employers use to report benefits in kind and expenses that have been provided to employees, are filed electronically or in paper form by 6 July each year, following the end of each tax year. Some employer representatives have suggested that completing and filing these returns is an administrative burden that could be avoided if benefits in kind and expenses could be accounted for through the payroll for both tax and NICs purposes when they arise. In addition, HMRC's Administrative Burdens Advisory Board has identified this separate process as one of the major irritants for employers in meeting their HMRC obligations.

Initial analysis suggests that including benefits in kind and expense details on forms P14 and P35 and withdrawing the separate requirement for forms P11D and P9D could reduce the costs to employers of meeting administrative obligations by between £14 million and £21 million. Further administrative savings in the region of £850,000 per year could be realised by removing the £8,500 earnings threshold that distinguished which benefits are reported on form P9D and which on form P11D.

Some employers already have informal agreements with their local offices to tax benefits through the payroll but, as there is no statutory basis to do so, such agreements do not remove the requirement for employers to file end of year P11D/P9D returns for these items.

The Government thinks that a more formalised statutory scheme for taxing expenses and benefits in kind through the payroll could help to align the process of accounting for tax and NICs and to reduce the number of separate end of year processes by abolishing the P11D/P9D forms and rationalising the number of filing dates. Where payments are liable to Class 1 NICs the process for dealing with tax and NICs would be more fully aligned although the Government has no plans to fully introduce a Class 1 charge on benefits in kind that currently attract a Class 1A charge. Introducing a new statutory scheme would involve estimated one-off costs for employers of between £15 million and £35 million.

HMRC is preparing to issue a consultation document in November 2007 on how best to introduce a system to tax benefits in kind and expenses through the payroll. The consultation will also include a proposal to remove the £8,500 threshold.

Guidance on tax and NICs

Existing HMRC guidance on PAYE tax and Class 1 NICs tends to treat the two systems separately and generally takes the legislation as its starting point rather than the tasks and responsibilities of employers and individuals. The guidance still reflects its origin in the work of two previously separate departments (the Inland Revenue and the Contributions Agency).

It has been proposed that there is scope for improving the structures, presentation and clarity of the guidance which would result in significant savings for employers by

reducing the risk of employers making errors in calculating employees' tax and NICs liability, and

making it easier for them to deal with queries from employees.

Measures already taken by HMRC to improve and simplify guidance includes improvements to the Employers CD-ROM, in particular the P11 calculator, and online combined tax and NICs guidance on benefits in kind.

However, HMRC accepts that there are areas where there is scope for further improvement including:

shared and consistent use of language to describe the two systems, to make it clear whether the advice applies to tax only, to NICs only, or to both

shifting the focus of the guidance from the legislative framework to the tasks and responsibilities of employers and individuals

improving the lay-out and presentation, and

greater cohesiveness and clarity, including more practical examples.

Making significant changes to the structure and format of HMRC's guidance is sensible only where the changes will genuinely aid employers. The Government does not wish to disrupt guidance that employers find useful and recognises that different employers will have different preferences. Consequently, HMRC intends to consult during 2007 with employers and businesses about priority areas for improving its guidance.

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Further information:
Income tax and national insurance alignment: an evidence-based assessment

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