Merging NI, scrapping thresholds and introducing individual rates will make taxation fairer, says thinktank

Income tax bands could be scrapped to give average earners as much as £1,100 each without costing the government a penny, according to a report calling for radical changes to make theUK tax system fairer.

According to the Institute for Public Policy Research thinktank, just as much money could be raised by the government if it merged income tax with national insurance, scrapped existing tax bands and introduced individual rates that would be tailored around pay and would rise with higher earnings.

The change would see the abolition of thresholds for tax at 20% for earnings between £11,500 and £45,000, for 40% on pay above that level up to £150,000, and 45% for any further earnings. IPPR said its proposal meant anyone earning less than £44,400 could see their average tax rate fall, while the richest 10th of earners would pay a larger proportion of their income in taxes than anyone else.

Alfie Stirling, senior economic analyst at IPPR, said: “The UK’s system of taxing incomes is not progressive enough, too inefficient and poorly equipped to raise the revenue that will almost certainly be needed to meet the public spending challenges of the 21st century.”

IPPR said the changes would give the government scope to raise significantly more revenue from income tax to fund public services. It said as much as £16bn more per year could be raised without excessively high top rates of tax, while also still increasing post-tax incomes for the poorest 40% of households.

The suggestion comes as David Willetts, the Conservative peer and chair of the Resolution Foundation, attempts to make the case for greater taxes on individual wealth to pay for rising health and welfare costs as the baby boomer generation increasingly reaches retirement.

In a speech on Monday, Lord Willetts will say that Britain’s tax system needs radical reform in order to avoid placing too much of a burden on young people already struggling to match the living standards of older generations.

By the end of the decade, welfare spending is set to rise by £20bn a year, and by £60bn by 2040, which would require an income tax rise of 15p in the basic rate to cover the funding gap.

He is expected to say: “The time has come when we boomers are going to have reach into our own pockets. The alternative could be an extra 15p on the basic rate of tax, paid largely by our kids.”

“Is that kind of tax really the legacy we – a generation who own half the nation’s wealth – want to bequeath our children and grandchildren?”