In our recent articles, we’ve been giving you our analysis of some of the Government’s recent changes to taxes, health and social care and pensions. In our last article, we discussed the upcoming changes to social care costs, and mentioned that they would be funded by an increase in National Insurance Contributions (NICs).
In this article, we’ll go into this increase in more detail, explaining what it is, when it comes into force, and what it will mean for both employees and employers. Read on to get all the information you need to know.
The National Insurance Contribution increase explained
So, what’s actually changing?
Well, the Government have announced an increase in National Insurance Contributions of 1.25 percentage points, i.e., the rate will be increasing from 12% to 13.25% for those employed, and from 9% to 10.25% for the self-employed.
National Insurance is a tax on all working adults, and it’s split out into different classes. This increase only applies to Class 1 and 4 contributions, essentially those employed by companies and those self-employed. As Class 2 and 3 contributions are rarely used, this increase will affect the vast majority of employed and self-employed taxpayers in the country.
Employers also pay NICs on each member of staff. This rate is also increasing by 1.25 percentage points, from 13.8% to 15.05%.
This change is coming into force in April 2022. However, from 2023, the Government is splitting the change out into a new levy: the Health and Social Care Levy, which will be a separate 1.25% levy visible on pay slips. So, functionally, while the increase to National Insurance itself is a temporary change for a year, the overall change to the taxes in the country will be a permanent one.
What does this mean?
This change makes National Insurance more expensive for both employers and employees. An employee earning £20,000 per year will pay an extra £130 in NICs per year, while someone earning £50,000 will pay an additional £505. This will obviously mean less money in your pocket!
For employers, it makes the cost of each member of staff’s salary more expensive. Of course, businesses don’t just pay a salary – they also pay taxes, pension contributions, etc. – and this adds to that part of the cost of each member of staff.
Why is it increasing?
This tax increase is being brought in to pay for the changes to social care costs we outlined in our last article. The Government have said that the money brought in by this tax increase will be ringfenced to help the NHS clear its current backlog in the short term, while in the long term it will be used to pay for the social care system in the country.
Are there any objections?
While many people agree with the Government that this tax increase is required as the country builds back from the pandemic, there are some who argue that this tax increase disproportionately affects those on lower incomes. This is because NICs are charged at the lower rate of only 2% on any income above £50,270 – so as your income increases, the amount you pay as National Insurance proportionally decreases.
There are also those who point out that this tax increase goes against the manifesto set out by this Government, which promised that taxes would not be raised.
Need help with your taxes and income planning? Or perhaps you’re a business wondering how this change may affect your cashflow forecasts? Speak to Face to Face Finance – expert independent financial advisers based in Norwich.