Employee benefit consultants (EBCs) will face a variety of problems if the government merges income tax and national insurance (NI), experts say.
George Osborne announced in his budget speech today the government will this year consult on merging the two systems to create 32% basic rate tax.
The Chancellor claims this will make administration simpler for employers and cheaper for taxpayers.
However, advisers and EBCs foresee problems with merging the two.
"The effects of a merger of income tax and national insurance will create a bigger upheaval than the A-Day simplification changes," says Robin Hames, head of technical at Bluefin.
"For more than a decade it seems like the merger of PAYE and NI has been the holy grail of simplification but two of the major obstacles have been the contribution-based nature of a range of state benefits, and the fact that there are a number of employee benefits that do not have the same tax and NI treatment."
Those benefits include critical illness, company cars, hospital cash plans and pensions.
"Any new tax treatment of employee benefits will drive changes that employers make to their pay and benefit packages," Hames adds.
Henry Tapper, director at First Actuarial, says EBCs often use the NI rebate available via contracting-out to encourage employers to set up pension schemes before recommending them to clients.
He adds the ending of contracting-out, which the government also hinted at today, would mean an end to NI rebates and put pressure on EBCs.
However, Neil Gough, client services director at Creative Benefit Solutions, says this will be more problematic for larger businesses which are more likely to have DB schemes still open to accrual, whilst SMEs normally have DC schemes.
Gough says the merging of income tax and NI raises several questions for the calculation of employee benefits.
"Salary sacrifice is pre-tax and NI, and employers often put the NI they have saved into the employee's pension. If tax and NI are merged, what will employers do?" Gough asks.
The situation is similar for additional voluntary contributions (AVCs). AVCs are calculated before tax but after NI is deducted, and Gough asks if AVCs will in future will be paid before or after a 32% tax.
He also says creating a 32% basic tax rate will skew the balance with pensions tax relief, which is currently 20%.
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