Chancellor George Osborne today announced the government will consult on the merging of income tax and national insurance contributions (NI).
Merging NI and income tax will create a basic tax rate of 32%.
Delivering his Budget, Osborne said using separate income tax and NI systems forced extra costs on businesses and taxpayers, and must be combined to make them "fit for the modern age".
He confirmed proposals would not include plans to make pensioners liable for NI and said the merger would take years to complete.
Without concessions for pensioners, who do not currently pay NI, this would create a "double blow" for the over-65s, who would have to pay the new merged tax on their pension as well as on any earnings from work.
There are concerns that ending NI will create more complications for people who have contracted out their second state pension, for which they currently receive rebates on NI or pay a reduced rate.
The Chancellor also announced today that tax allowances, such as the limit on tax free ISA contributions or CGT allowances, will be uprated by CPI from April 2012.
The income tax threshold will rise to £8,045 from April 2012 and the threshold from April 2011 is £7,475.
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