CHANGES TO NATIONAL INSURANCE IN THE UK: WHAT YOU NEED TO KNOW

By Talha Aslam, Payroll Manager at Shenward.

In a recent parliament meeting, it was announced that there will be changes to national insurance in the UK – more specifically, it is set to increase.

Being the biggest story of the week, the announcement is everywhere – but with so much information circulating, how can you be sure what the national insurance increase in the UK will mean for you?

Below, we’ll answer your questions providing you with easily digestible information relating to the national insurance increase taking a further look into what it all really means and how it will affect you.

Changes to National Insurance – where, why and when?

On the 7th of September, Boris Johnson announced to parliament that National Insurance is going to be raised by 1.25% from April 2022 in the UK.

From 2023, the increase in payment will be separated and become known as the health and social care levy, which will be paid by all adults including those working who are above the state pension age, unlike other National Insurance Contributions (NICs).

It is said that the payment will still be taken the same as National Insurance, but will be reflected separately on your payslip.

Self-employed National Insurance and Dividend taxes will also increase from April 2022 at the same rate.

 

What is National Insurance?

Class 1 National insurance is a tax paid by both employees and employers. It is automatically taken from an employee’s wage – the amount paid can be found monthly on your payslip.

Class 4 National Insurance is paid by self-employed workers. 

Both classes will be subject to the 1.25% increase, but classes 2 and 3 will not be impacted.

National insurance contributions are paid into a fund that helps to fund the NHS, state pensions, maternity leave and other state benefits.

Why is National Insurance being increased?

The increase is said to be implemented to help the funding crisis within social care and the NHS.

The Government has said that the rise in National Insurance Contributions (NICs) and the health care levy will help the NHS clear their backlogs, as well as resolve the long-standing issue surrounding social care.

In terms of numbers, the Government explained that the increase will raise £12 billion a year, which will initially go towards easing NHS pressures, but over the next three years, some of the money will be moved to help the social care system.

This will predominantly help older people and people with high care needs who are unable to do basic tasks on their own such as washing and dressing. Though the increase has been announced, it hasn’t come without criticism.

How will it affect me?

Just like National Insurance and Income Tax now, it will affect you differently depending on how much you earn.

For a standard basic rate tax player earning £24,100, their national insurance contribution will increase by around £180 per year. A higher rate tax paying who earns £67,100 will contribute an additional £715 to what they currently pay.

National Insurance will increase per the table below:

Employee Class 1 NICsEmployer Class 1 NICsSelf-employed Class 4 NICs
NICs rates for 2021/2212% / 2%13.8%9% / 2%
NICs rates for 2022/2313.25% / 3.25%15.05%10.24% / 3.25%
NICs rates from 2023/2412% / 2%13.8% 9% / 2%
Health and social care levy from 2023/241.25%1.25%1.25%

Dividend tax on dividends earned above £2,000 will increase per the table below:

Basic rate taxpayersHigher rate taxpayersAdditional rate taxpayers
Dividend tax rates for 2021/227.5%32.5%38.1%
Dividend tax rates from 2022/238.75%33.75%39.35%

Why is this a controversial increase?

The raising of taxes is no new occurrence in the UK.

With this particular decision to increase the National Insurance, the main controversy is around the Tory Manifesto and their promises not to raise any taxes while in power. Going against a manifesto promise instils the idea that they are betraying the terms on which they were voted in.

Boris Johnson defended his decision by arguing that the pandemic was an unforeseen issue so renders any promises in a manifesto too difficult to uphold. But many believe that the timing of this increase is poorly decided upon, with many people and businesses facing financial issues – paying extra contributions could be debilitating to people’s financial standing.

Furthermore, the increase is being branded a ‘tax on jobs’. This means that the tax is affecting those in work and their activity – rather than profit, resulting in lower earners being disproportionately affected by the increase. Also, the increase in dividend tax payment will impact small business directors who received no support from the government throughout the pandemic – making it a bitter pill to swallow for those who have to now help in repaying the costs. Employment specialists have warned that the raises in these taxes may discourage businesses from creating more job opportunities, at a time where the UK is facing a large crisis in recruitment. The argument stands that business owners should have been allowed longer to recover from the pandemic before being faced with additional concerns through raises in tax and National Insurance.

Why National Insurance and not a different tax?

The argument supporting the increase in National Insurance is that both employers and businesses contribute to national insurance, which spreads the payment, as Boris Johnson said the if they used an alternative method where only employees contributed, they could have been faced with double the increase.

Critics, however, argue that this is a tactic by the Government as people are less familiar with National Insurance. If they were to raise income tax, for example, people are more knowledgeable around the tax and as such more informed about what they are paying – and willing to pay.

Furthermore, choosing to use National Insurance as opposed to Income Tax disproportionately affects lower-paid earners. This is because as your income exceeds £50,000 National Insurance is a smaller proportion of your wage – unlike income tax.

Other alternatives to raising National Insurance Contributions are instead raising Capital Gains Tax (CGT).

The CGT is a tax on the profit of an item sold that has increased value – so you are taxed on the gain and not the amount of money you receive. Capital Gains are taxed at lower levels than income because people are seen to be making an investment or entrepreneurial risk. The tax is almost exclusively paid by wealthy older households with great assets and property portfolios. The argument is that raising this tax to a similar level to income tax could create around £17 billion in funding – and would save low earners from being disproportionately affected.

Finishing thoughts

As you have read, there is a lot of controversy around the latest announcement to increase National Insurance Contributions and Dividend tax.

Looking forward with the increase in mind, questions are raised as to whether the increase can be considered a ‘tax on jobs’, and could it stifle employment and the creation of jobs – with businesses not being financially stable enough to be able to support the additional payments.

Furthermore, would an alternative to raising National Insurance have been more appropriate? As opposed to threatening an already weak job market, would a fairer way to secure the levy be profits based, like the self-employed, as opposed to being based on jobs? Whether the decision is right or wrong, as it stands Class 1, and 4 National Insurance Contributions and Dividends will raise by 1.25% from April 2022 and will become a separate health and social care levy from 2023.



Shenward