MPs have voted in favour of the Prime Minister’s plan to increase National Insurance to help fund health and social care.

The vote gives the Government the green light to rise National Insurance contributions (NICs) for workers and employers by 1.25% from April 2022.

Boris Johnson hopes the UK-wide tax hike will raise £12 billion a year.

What is National Insurance?

National Insurance is a tax on your earnings or self-employed profits. You pay the charge if you’re an employee, employer or a self-employed worker.

By paying NICs, you qualify for certain benefits and the state pension. And you need a National Insurance number before you can start paying the levy.

Currently, you pay 12% National Insurance on your annual earnings between £9,568 and £50,270, and there’s a 2% charge on earnings above that amount.

Will you be affected by the rise in NICs?

From April 2022, you’ll be liable for the increase if you’re below the state pension age and you’re an employee, employer or self-employed worker.

Then, from April 2023, the increase will become a separate 1.25% Health and Social Care Levy, while the NICs will return to their previous level.

As with National Insurance contributions, this new levy will be paid by workers, employers and the self-employed. What’s more, you’ll be liable for the Health and Social Care Levy from April 2023 if you carry on working after you’ve reached state pension age. However, you’ll continue to be exempt from ordinary NICs.

And if you own shares in a company, you’ll see a 1.25% tax rise on your share dividends.

What will the funding be used for?

The Government plans to invest £36bn in the health and care system across the UK over the next three years. It hopes the money will “tackle the Covid backlogs, reform adult social care, and bring the health and social care system closer together on a long term, sustainable footing”.

For England, the proposals include:

  • You won’t have to pay more than £86,000 in care costs – not including food and accommodation – over your lifetime
  • If you have less than £20,000 in assets, you won’t have to pay towards your care from your assets
  • If your assets are between £20,000 and £100,000, you’ll receive means-tested state support towards the cost of your care

Our thoughts on the tax changes

We all know the tax system needs to be changed over time to tackle some of the financial difficulties caused by the Covid-19 pandemic. And social care has been an issue for many years, with it becoming more critical over the last 18 months.

Tax rises are always unpopular, no matter which method is chosen.

National Insurance has historically been used as a ‘stealth tax’ because most people will continue to see themselves as basic-rate or higher-rate taxpayers – and this will stay the same for everyone, except people receiving dividends. For that reason, it’s generally more acceptable, psychologically, than a ‘tax’ rise.

Unfortunately, it’s a further tax on workers and employers, despite it being badged as ‘National Insurance’. The changes are also an extra burden for business owners, because of the dividend tax increase.

But there’s understandably been an enormous amount of support for workers and businesses during the pandemic, so National Insurance is probably the logical place to start to raise additional funds.

Whether this is fair or not will come down to your personal view, but we all know changes are inevitable.

Trusted tax advice

Our experienced tax advisers help people and businesses in the West Midlands and across the UK to manage their tax payments.

To find out more, call Churchill Taxation on 07813 434195 or email: stephanie.churchill@churchilltaxation.co.uk

Steph Churchill

Stephanie Churchill

Managing director & co-owner of Churchill Taxation