George Osborne could merge income tax and national insurance if the Tories are re-elected at the next general election.
In a manifesto pledge that would see the basic rate of income tax soar, the Chancellor is looking at rolling together the two revenue tools after 2015 in the hope of making clear to people the real level of tax that they have to pay.
The merger, something that Osborne believes is a "stealth tax", would risk public outrage as the total amount paid by workers on the basic rate of income tax would rise to 32%, up from 20%. However, those in the higher income bracket would rise from 40% to about 52%, with 2% extra for earnings above £42,000.
Critics warned that the move could end up hitting pensioners, who do not pay national insurance, by making them pay the new charge on their pensions. However, a source insisted: "Some people think it is a cynical attempt by politicians to ensure they keep paying national insurance, but it isn’t".
Others warned that the "disastrous" move risked undermining the National Health Service as national insurance, which dates back to 1911, grew to help fund the health service and social service programmes.
“People understand national insurance is covering social welfare, not least the NHS,” warned Labour member of the Treasury select committee John Mann. “Merging it with tax would be a long-term way of undermining the NHS. It’s the sort of thing the Tea Party would come up with in the United States.”
Combining the two taxes would be a bold step for Osborne, that even previous chancellors have shied away from. “We came within a whisker of doing this at the last budget, but in the end we decided against it,” a source told the Times. “They are currently on two separate computer systems and we thought the risk was just too great. But it’s something we could do in the next parliament.”
National insurance is the government's second biggest source of income, raking in £104.5 billion in 2012-2013, while income tax brought in £152 billion.
The idea comes alongside another proposal the Treasury is pushing through to give everyone a personalized tax bill that shows how their tax payments are being spent.
The move would save the taxman hundreds of millions of pounds in administration, however it is feared the process of merging two computer systems could fall foul of IT problems that are currently dogging Iain Duncan Smith's Universal Credit welfare scheme.
The coalition first floated the idea in 2011, with the government launching a consultation on how to make the UK's tax system more simple and more transparent.
Launching the consultation, treasury minister David Gauke said: “At the moment, for a lot of people, the tax line on their pay slip is the only time they see just how much they’re paying in tax, but the Government doesn’t think that’s good enough. We want to make tax more transparent and we want people to be more engaged with their own tax affairs."
Richard Baron, head of taxation at the Institute of Directors, said the move "would bring radical simplification, and transparency about the true level of income tax in this country".
He added: "The basic rate is not 20 per cent, but 32 per cent if we consider only employees’ contributions, and an effective rate of 40 per cent if we consider employers’ contributions too."
The latest reports about the Tories' tax proposals come as Labour says it is considering reforms to encourage long-term business investment as part of a plan to create a "fairer" system.
The party is looking at a number of measures to halt short-termism in the corporate world, including introducing a lower rate of capital gains tax for investors who stay the course and a system of tax reliefs to encourage companies to rely on equity rather than debt.
Shadow chancellor Ed Balls confirmed he intends to push ahead with proposals to overturn a planned cut in corporation tax if Labour takes power next year to fund a reduction in businesses rates - a move aimed at smaller companies.
In a speech to the London Business School, Balls said: "New times demand a new approach. Not only do we face new challenges from technological change and globalisation, we must also deliver at a time when there is less money around."