The government is reviewing the possibility of merging income tax and national insurance (NI) into a single tax to make things simpler for taxpayers. Following July's summer Budget, David Gauke, financial secretary to HM Treasury, said in a letter to the Office of Tax Simplification (OTS) that he wanted it to review the potential for 'closer alignment' of income tax and national insurance. “This is an area often cited as a major source of complexity for taxpayers,” he writes. “I would like the OTS to look at what the impacts, costs and benefits of closer alignment would be and to set out what the necessary steps would be to achieve closer alignment.” According to press reports, chancellor George Osborne has previously considered merging the two taxes in his 2014 Budget but refrained from doing so due to complexities linking the respective IT systems. In a document outlining the review - which the OTS hopes to complete in time for next year's Budget - the office says: “Differences in the rules and procedures between the income tax and [national insurance contributions] systems were found to be the second highest source of complexity for small businesses.” The idea was also mooted in 2011, but kicked into the tall grass until progress was made on other tax changes being worked on at the time. Expert viewGary Smith, financial planner at Tilney Bestinvest, outlines four potential implications of the merge: 1. Potential reduction in tax liability - the starting rates at which you pay income tax (£10,600) and national insurance (£8,060) are different. Logic would dictate that, given the Conservative pledge to increase the personal allowance to £12,500, this would also have to be the starting rate for any combined income tax/NI rate. This would mean that everyone could earn £4,500 more before paying any NI equivalent. 2. It would enable the government to increase the rate at which people pay higher rate tax to £50,000, while reducing the potential loss to the Exchequer. This is quite devious, as under the current system an individual pays 40% income tax and only 2% NI above the basic rate band. So, if they leave the system as it is, the exchequer will be giving up 20% income tax on circa £8,000 of income if they do increase the basic rate band to say £50,000 (including personal allowance). However, if the government merge income tax and NI, the effective basic rate tax would be 32% and the higher rate 42%. Therefore, if they increase the basic rate band they are only giving up 10% on £8,000. 3. The death of pension tax relief? At present, a basic rate taxpayer gets 20% tax relief on pension payments, but surely this would increase to 32% under a combined system. It seems illogical to increase tax relief at a time when they are actually trying to reduce the cost to the Exchequer. An equal tax treatment of Isas and pensions could be a prelude to merging the two, potentially drawing Isas into some form of lifetime allowance. 4. Would any new rate apply to dividends? We have already seen the introduction of tax on dividends of 7.5% for basic rate taxpayers from April 2016. At present NI isn't payable on dividends, and one could suspect that the government will also seek to increase this rate to reflect the merged rate. While probably below the 32% rate for people with earned income, the additional tax generated could cover the cost of increasing the basic rate band to £50,000.