By Max Clarke

Ahead of next week’s budget, tax expert Simon Massey from accounting firm Menzies discusses the possible impacts of various proposed changes to the tax system.

If the Office of Tax Simplification’s proposals for merging income tax and National Insurance (NI) are implemented, retired people and those living off savings stand to lose out as they do not currently pay NI.

“A combined tax would place an unreasonable burden on anyone who does not currently pay NI unless specific allowances were made for this type of income.” Said Mr Massey.

Flat-rate could complicate tax for small businesses

The Office of Tax Simplification’s recommendation for a flat-rate tax scheme to help small businesses would be difficult to implement fairly and could ultimately create a more complicated tax structure, warns Simon Massey, Tax Partner at Menzies accountants.

Any flat-rate scheme will require HMRC establishing an “average” tax rate that will be applied to small businesses. Some businesses will benefit and others will lose out, so to be fair there would have to be many flat rates, and this could ultimately be quite complex.

If the government introduces a voluntary scheme, small businesses will have to decide for themselves whether or not it is financially worthwhile joining. The irony is that presenting such a choice further complicates the tax system instead of simplifying it.

Flat-rate tax is a good idea in theory, but as we have already seen with the flat-rate VAT scheme, which was introduced in 2002 but has not been universally adopted, simplicity does not always result in cost savings.

Savers risk paying too much tax with new tax software

Savers face being accelerated into a higher tax bracket as a result of new computer software being introduced by HMRC. The software is designed to cut out data processing errors by automatically updating people’s tax codes when their tax return is sent to HMRC.

But accountants fear that the system will penalise savers whose income varies from year to year.

Simon Massey, Tax Partner at Menzies, said: “The system assumes a continuity of income and deductions year on year, which is unrealistic. Also it collects 40% or 50% tax on your savings income at an earlier point than is required under the tax law. So this accelerates payment of tax.