What Everyone Needs to Know about Tax. Hannam James

most respects, however, NICs and income tax are drawing ever closer together. For example, until 1991, there was no national insurance on many perks such as company cars. Even in the 1990s, it was still possible to exploit gaps between the rules on income tax and NICs. Some city firms were paying bonuses in gold or diamonds to avoid national insurance (which was payable on cash wages only).

      More recently, both Labour and Conservative governments have been ironing out the smaller wrinkles to make national insurance and income tax as similar as possible. Nowadays, many benefits in kind, including company cars, are subject to both income tax and employers' national insurance. They go on a special form called a P11D and you pay tax on the monetary value of a benefit as if it were cash. As it happens, one of the most tax-efficient perks available today is not turning up to work. If you take extra holiday as a benefit (and many firms allow their employees a few extra days a year in exchange for sacrificing some of their salary), the cost to you is only the pay you would have received after tax.

      Although income tax and NICs are now administratively almost identical, no politician is going to amalgamate them into a single transparent rate of tax. After all, under the First Golden Rule, there is no sense in emphasising how high the combined rates of tax that we pay really are. Tory MP Ben Gummer did suggest in 2014 that NICs should be renamed ‘earnings tax’. That would, at least, be a candid name.

      Paying tax

      Most people with jobs don't have to worry about paying their taxes as it is all done for them automatically. Payslips show the tax paid, but many of us never really look at any figure except the bottom line, which is our take-home pay. We pay most of our taxes through PAYE, which was invented at the end of the Second World War as a way to improve the efficiency of tax collection. From the point of view of the government, it has three major advantages. The first is the official one. The administration of the tax system for employees was handed to the people they work for. It was no longer necessary for individual workers to figure out how much tax to pay. Instead, our employers calculate the tax we owe and deduct it from our salary. We only ever receive our net wages. The tax component is paid straight over to HMRC. In effect, this privatised a large chunk of tax collection. The primary responsibility for gathering tax was transferred from the tax authority to employers. They bear the cost and suffer the penalty if things go wrong. It is much easier for HMRC to audit employers' tax collection systems than it is to check the tax returns of all the individual employees.

      The second advantage of PAYE for the government is that it accelerates when the money arrives in the Treasury's coffers. With PAYE, the government gets paid monthly, just like we do. I receive my net salary and the Exchequer receives both the income tax and national insurance. Given that, between them, NICs and income tax collected through PAYE account for over half the government's total tax-take, the cash flow benefits of regular payment are extremely significant.

      The third advantage of PAYE is the subtlest, but perhaps the most important: we never see the tax we are paying. Out of sight, it is kept out of mind. Employers' NICs are also concealed in plain sight. Most of us never think about them or realise that they are a tax on our salary just as much as income tax. Even though employees' national insurance and income tax are supposedly taxes that we pay ourselves, the system requires businesses to pay these taxes on our behalf using the same PAYE machinery with which they account for employers' national insurance. So we never possess our money before the government gets its paws on it.

      Ensuring that we hardly ever have to pay any tax directly is a major pillar of the UK's revenue system. In fact, it is a principle that deserves to be enshrined in the Third Golden Rule of tax: taxes are kept as invisible as possible. The government wants to avoid people paying their taxes directly so they are less likely to notice them. I can explain why this is so important from personal experience.