Q and A: National Insurance Increase

The government has announced an extra tax to fund social care in England, and help the NHS recover after the pandemic.

As part of the new plans, employees, employers and the self-employed will all pay 1.25p more in the poundfor National Insurance (NI) from April 2022.

  • Employees pay NI on their wages
  • Employers also pay extra NI contributions for staff
  • The self-employed pay NI on their profits

But from April 2023, National Insurance will return to its current rate, and the extra tax will be collected as a new Health and Social Care Levy.

This levy - unlike National Insurance - will also be paid by state pensioners who are still working.

This of course will affect a number of our clients and those across our network. So, we have put together a simple Q an A with our Director of Tax Innovation, Richard Hill to provide some of his expertise and clarity around the changes. 

Richard, why did the government make this decision?

That’s a good question, as given that it is admittedly a clear breach of a manifesto promise, the government clearly felt this was an essential move. Budgets have been hit by the measures taken during the pandemic, and there will be a lot of pressure to recoup this money somehow – we have all been expecting some form of tax increase in the near future. In addition, in his first speech after stepping into his role, the Prime Minister had committed to reforming social care. This reform will cost money, and sothere was also a drive to generate additional funds to cover this reform.

Could they have increased another tax, some people aresuggesting income tax? 

It is worth noting that the government has also increased income tax on dividends by the same amount as the NICs increase. Having said that, I expect that some of the thinking is that there is a historic connection between National Insurance and benefits such as the state pension, and given the additional funds are ringfenced for social care and the NHS, perhaps it felt like an easier argument to make.

The reason some people are upset by the choice is that NICs area more regressive tax at very high incomes, meaning that people in the middle range of incomes end up paying the most proportionally. This means the plan hasfaced criticism from those who see this as a tax on the young to pay for the old – hitting graduates just starting to pay back student loans particularly hard. 

How will this affect the average person? 

Ultimately, this will mean less money in each pay-packet for those who pay NICs. Someone earning a salary of £20,000 will pay an additional £130, and someone on £50,000 an additional £505 per year for example.

The flip side is that anyone with less than £20,000 in assets will not have to pay for care costs, and people with less than £100,000 will see their care costs subsidised. No one will have to pay more than £86,000 incare costs, though food and accommodation are not included in this cap.

How will it impact business owners? 

Payroll costs for all businesses will see a direct increase as aresult of the changes. Director/owners of small businesses who primarily take their income as dividends will also be hit particularly hard by the dividend rate increase, as they received little help during the pandemic compared to employees or self employed workers who drew a salary.

Is there anything businesses can do to prepare for theincrease? 

It is a difficult position, especially for small businesses.There is little businesses can do to avoid the increased costs, so it is important that they plan ahead of time, budgeting for the increased staff costs and making sure that their other tax and accounting affairs are in as good and efficient a shape as possible. If savings need to be made elsewhere, or additional revenues generated, it will be best to have us much forewarning and planning time as possible. 

It is more important than ever for people to review their tax positions. For example, basic rate tax payers (pensioners) are able to transfer up to 10% of their unused personal allowance to their spouse. The tax saving could off-set the NIC increase.

Dividend tax rates from April 22 will be 8.75% for basic rate tax payers.The £2000 dividend allowance will remain.  We are able to advise on speaking to an IFA on investment portfolios to get a balance between equity based and interest based investments to utilise the savings nil rate band. This is particularly important for basic rate pensioners relying on investment portfolios to top up their pension.

Are you making full use of ISA exemption? All these things we are on hand to help advise and assist you with further. We have our incredible, award-winning Friend Programme to help the business community. So please do reach out if we can be a friend in business to you.

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If you’d like to speak to a member of our team, please email advice@aspen-waite.co.uk or call 01278 445 151.

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