PM hikes national insurance to pay for health and social careby
The Prime Minister announced a 1.25% increase in national insurance from April 2022 to stem the post-Covid health and social care crisis. In doing so, he broke a manifesto promise not to raise core taxes.
Speaking in the House of Commons this afternoon, Boris Johnson announced a new 1.25% health and social care levy on earned income, with dividend rates increasing by the same amount.
Johnson said the levy would fix the long term problems of health and social care that have been “cruelly exposed by Covid”. However, the announcement breaks the government’s manifesto pledge to freeze the rates of NIC, VAT and income tax.
The hike in national insurance comes into effect next April and Johnson expected the hypothecated levy to raise almost £36bn for health and social care over the next three years.
The 1.25% health and social care levy will be a separate tax to income tax and national insurance.
The levy means that people starting care from October 2023 would not pay more than £86,000 over their lifetime (not including accommodation) and those with assets of less than £20,000 will not make any contribution. In what is going to create further headaches for advisers, the amount of help given to anyone with assets between £20,000 and £100,000 will be means tested.
How the levy will be funded
The levy will be shared between individuals and businesses, but Johnson reasoned that “everyone will contribute according to their means, including those above state pension age”.
He continued: “Those who earn more, will pay more. Because we’re increasing the dividends tax rate we will be asking better off business owners and investors to make a fair contribution too.”
The PM confirmed that the highest earning 14% will pay around half the revenues and no one earning less than £9,568 will pay. He claimed that 40% of all businesses will pay nothing at all.
The NIC increase is on both employers and employees, so as Richard Murphy pointed out on Twitter, “The real increase is 2.5% and employers will recover their share by reducing pay increases just as the lowest paid are going to see big increases in the cost of living.”
Why not income tax?
Before Johnson’s announcement the opposition and some within the PM’s own party had argued against the measure, asking why the government decided against increasing income tax or capital gains tax instead. The prime minister defended opting for the national insurance option.
“Income tax isn’t paid by businesses so the whole burden would fall on individuals, roughly doubling the amount that the basic taxpayer could come to expect and the total revenue from CGT amounts to less than £9bn this year.”
Responding to a question from Labour shadow chancellor Rachel Reeves about imposing a tax on jobs, Rishi Sunak said no NICs were payable by those employing people under the age of 21, nor apprentices up to the age of 25, “nor on people who are going to be employed in new freeports”.
Faced with the unexpected sight of NI making national headlines, AccountingWEB reader Adam Murphy asked on Any Answers whether the government will address directors NI for small companies.
Rather than simplifying the tax system, critics have branded this afternoon’s announcement as increasing its complications. “Creating an entirely new tax to fund health and social care. A massive and unnecessary increase in complexity. Achieving nothing that could not have been done within existing income tax and NI systems,” said Institute of Fiscal Studies director Paul Johnson.
It is also expected to be another blow to sole directors. Rebecca Seeley Harris said the 1.25% tax increase on share dividends as well as NICs at 1.25% was “particularly unfair on the very same directors who were denied help during the pandemic, who are being targeted to pay for the recovery”.
Seb Maley, the CEO of Qdos, called it a “short sighted attack” on the self-employed.
“Raising NICs and dividend tax is a move that directly impacts millions of people working for themselves - people who have arguably been hit the hardest by the pandemic. Once again, it seems that the smallest businesses are bearing the brunt of tax reform. Yet still, it will be the flexibility, dynamism and skills of the independent workforce that the government needs most to speed up the economic recovery.
“The national insurance tax hike will hit employers too, pushing up the costs of hiring workers on the payroll. It goes without saying that this could stifle employment growth.”
Raising more concerns Praveen Gupta, national head of tax at Azets, questioned the impact the increase will have on younger people “at a time when the unemployment rate among under-25s is already rising”, and small businesses as they rebuild from the pandemic.
“For SMEs, there is now even more of a need to focus on NI strategies, such as salary sacrifice measures that could provide businesses and individuals with tax savings,” he said.
Further pressure on payroll
The government’s national insurance increase ironically comes during national payroll week and after 18 months of furlough claims, today’s announcement will put further strain on payroll professionals.
“Whilst technology will allow payroll teams to implement this change efficiently, it is inevitable that this announcement will put pressure on payroll professionals who will be relied upon by employees, clients and businesses to understand the cost impact of these new measures,” said Samantha Johnson, policy lead at the CIPP.
“This a timely example on national payroll week of how important the payroll industry is to support the UK economy in delivering these new measures, whilst helping to guide individuals and businesses to understand what it means to them."