Yahoo Finance National Insurance rise starts to hit pay packets of millions of workers
Millions of workers will begin paying higher National Insurance contributions from today as the 1.25 percentage point increase kicks in.
Today’s changes mean those earning above £9,880 will now be liable for 13.25% NI contributions, up from 12%. Earnings above £50,270 will be charged a rate of 3.25%, up from 2%.
Businesses will also see their contributions rise, at a time when they are already juggling rising costs. Tax rates for dividend income also rise by 1.25 percentage points.
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But from July, national insurance will only start to be charged on earnings over £12,570, because chancellor Rishi Sunak announced a £3,000 rise in the NI threshold in last month’s spring statement. That will take around two million workers out of direct tax altogether (if they earn less than £12,570 per year).
Critics call it a tax on jobs and warn that it may result in companies having to raise prices or squeeze wages.
According to Resolution Foundation, everyone earning less than £32,000 a year will be better off from the combination of those two policies from July.
The UK Government predicts that the tax rise will raise £39bn over the next three years to help reduce the COVID-induced NHS backlog and later reform adult social care for the long-term.
The rise comes after the UK's energy regulator increased the price cap by 54%, and increases to council tax and water bills, mortgages, rents, food and transport costs.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: Sarah Coles, senior personal finance analyst, Hargreaves Lansdown, said: “Awful April is just the beginning of an incredibly tough few months…
“The real pain of the national insurance hike will be felt on payday, at the end of the month.
“At that point, we’ll be reeling from the impact of higher energy bills, council tax, water bills, fuel costs – and we’ll have to manage it all on a smaller pay packet. It’s a terrible time to hike taxes.”
She added: This is a terrible time for a tax hike. Millions of people are already worrying about how they can possibly cover rising costs, so to wring more money from their pay is a particularly harsh blow that few can afford.
Coles said the rise in the NI threshold will help combat the cost of the increase for lower and average earners.
But she said: “It doesn’t actually affect pay packets until the end of July.”
She continued: “In the intervening months, the threshold will be just £9,880, and the 1.25 percentage point rise will leave someone earning £20,000 paying £130 more a year, someone on £30,000 will pay £255 more, and someone earning £50,000 will pay £505 more a year.
Annual salary of £20,000 - £130
Annual salary of £30,000 - £255
Annual salary of £50,000 - £505
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Salary sacrifice schemes could help combat the impacts of the hike but Adrian Lowery, personal finance expert at investing platform Bestinvest, said: “An employer could agree to contribute a greater proportion of your salary into your workplace pension, in lieu of pay.
“While pension contributions always benefit from income tax relief, if this system is used then national insurance relief is also obtained.”
He said there are downsides, however, to reducing your salary, such as decreased mortgage affordability.
Boris Johnson has defended the decision to hike up national insurance for millions of workers, arguing that the manifesto-breaking rise is “necessary, fair and responsible”.
The health secretary also defended the decision to hike up national insurance for millions of workers as he argued it is “right that we pay for what we are going to use as a country”.
Sajid Javid told Sky News: “It kicks in today, the new health and social care levy. All of the funding raised from it is going to go towards the extra £39bn we are going to put in over the next three years to health and social care.
“It’s going to pay in the NHS for activity levels that are some 130% of pre-pandemic, it’s going to be nine million more scans, tests and procedures, meaning people will get seen a lot earlier.
“Why is any of this necessary, whether it is for health or social care? It’s because of the impact of the pandemic. We know it is unprecedented. It has been the biggest challenge in our lifetime. The impact of that is going to continue for many years.”
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The Conservative 2019 election manifesto pledged "not to raise the rates of income tax, national insurance or VAT" but it has been argued that the promise was made before the pandemic.
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."
From April 2023 onwards, the National Insurance rate will decrease back to the 2021-22 level, with a new 1.25 per cent health and social care levy legally introduced.
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