1.25% national insurance rise kicks in
From 6 April, employees and employers will have to pay an extra 1.25% on their National Insurance contributions (NICs)
The controversial 1.25% rise to national insurance, which will be separated to become the social care levy in 2023 to directly fund the NHS, affects everyone under the state pension age or earning more than £9,880 annually.
It means that, instead of paying national insurance contributions of 12% on earnings up to £50,270 and 2% on anything above that, employees will now pay 13.25% and 3.25% respectively. The self-employed will see equivalent rates go up from 9% and 2% to 10.25% and 3.25%.
Announced in September last year, the government stated that the measure will bring in an extra £39bn over the next three years to tackle the Covid-19 backlog and reform adult social care.
At the same time the dividend rate will rise by 1.25% across the board from 6 April. The dividend ordinary rate will be set at 8.75%, the upper rate will be 33.75% and the additional rate will be 39.35%. The dividend trust rate will also increase to 39.35% to remain in line with the dividend additional rate.
In a statement, Chancellor Rishi Sunak said: ‘This government will not shy away from the difficult decisions we need to take to fix our social care system and slash NHS waiting times.
‘The Health and Social Care Levy will fund a third more elective care, over 17m extra diagnostic tests and cap the cost of care so people no longer live in fear of losing everything to pay for care.
‘The British people deserve the best health care in the world and delivering that is our top priority.’
The ‘manifesto breaking’ decision has been met with severe backlash from MPs across all parties particularly since the inflation rate has risen to 7% and Ofgem’s energy price cap increased by £700 to £1,900. Many have stated that the NIC increase will make lower earners even worse off.
In order to mitigate this, the Chancellor confirmed in the Spring Statement that the threshold for paying national insurance will rise from 6 July 2022, meaning that from that date, national insurance will not be paid until a person earns more than £12,570 a year, or about £1,047 a month, which brings it in line with the personal tax allowance threshold.
Christine Cairns, tax partner at PwC UK, stated that from July the increase in the national insurance thresholds will mean that people earning up until the threshold will actually see a lift in their paychecks.
Cairns warns, however that due to the freezing of the income tax thresholds until 2025-26, which was announced in the Spring Statement 2021, more people may be dragged into the higher tax brackets with rising wages and inflation.
Cairns said: ‘People who have had a pay increase from their employers in response to inflation could be pushed into higher tax bands as a result of the frozen income tax thresholds, leaving them less able to keep up with increasing prices of goods and necessities. The freezing of income tax thresholds will start to squeeze households, with even the cut in the basic rate band from 2024 not compensating for this year on year.’
PwC stated that if the thresholds increased in line with the Office of Budget Responsibility’s inflation predictions, by 2025-26 the personal allowance would increase by £2,051 from £12,897 to £14,621 and the higher threshold would increase by £24,469 from £153,900 to £174,479. The higher rate threshold would increase by £8,204 from £51,577 to 58,474.
Ruby Flanagan, Reporter, Accountancy Daily
