April 6 marks the start of the new 2022-23 fiscal year and the day most workers start paying a new tax: the health and welfare tax. For one year only, the levy will take the form of an increase of 1.25 percentage points in the social contribution paid by employees, their employers and the self-employed. Thereafter, it will appear on payslips as a separate tax.
In the spring statement, Chancellor Rishi Sunak was adamant that National Insurance rate hikes will continue. But, responding to concerns over the cost of living crisis, he announced that the income threshold at which you start paying National Insurance will increase to £12,570 from July 6, 2022.
For most employees, this will more than offset the rate hike. The impact on you will vary depending on your income and how you are affected by other tax and benefit changes.
National Insurance is a tax paid by workers (employees and self-employed) aged 16 up to statutory retirement age (currently 66) on income and profits above a specified threshold, which was £9,568 in 2021-22. From April, the threshold rises as planned to £9,880. However, following Sunak’s announcement, the threshold will rise again in July to £12,570, bringing it in line with the personal income tax abatement. From 2023-24 the threshold will remain at £12,570.
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The National Insurance increase means that for employees, instead of paying 12% on earnings up to £50,270 and 2% on anything over that, you will pay 13.25% and 3.25% respectively %. If you are self-employed, your rates will go from 9% and 2% to 10.25% and 3.25%.
After April 2023, the levy will be separate from National Insurance and will appear on your payslips as a separate tax. At this stage, the health and social care tax will be extended to include workers over the statutory retirement age. But pensioners who do not work will not pay the levy.
From April 2022, the tax on dividend income will also increase by 1.25 percentage points. It is primarily a tax avoidance measure to prevent self-employed people who operate through companies from avoiding the levy by paying themselves dividends instead of income.
How you may be affected
Raising the threshold will prevent 2.2 million people from paying national insurance.
Looking at the combined effect of the threshold rise and the rate hike, employees earning up to £34,370 will see a reduction in their National Insurance in 2022-23 compared to 2021-22. People earning more than that will see an increase. Someone earning full-time on average (£31,772 a year) will save around £33 in 2022-23, and a little more in subsequent years given the combined effect of National Insurance and the new levy.
However, the national insurance measures are only part of a series of changes affecting incomes.
To help get public finances back on track post-pandemic, income tax and personal allowance thresholds have been frozen at their 2021-22 levels for the next four years, where they would normally increase with the inflation (Scotland sets its own thresholds but has also frozen them for this year). This means that as incomes rise, more people will start paying taxes, proportionately everyone pays more tax than they would have, and the number of higher rate taxpayers increases.
The third and fourth columns of the table show the combined effect of national insurance and income tax measures on the proportion of income covered by tax. The combined average tax rate decreases for those with incomes below £34,370, but increases for higher incomes.
On the positive side, around 1.4 million low-income people will see a 6.6% increase in the national living wage. And around 2 million workers benefit from increased Universal Credit (average of £1,000 per year).
However, the outlook for inflation is deteriorating and many local authorities have also announced an increase in housing tax. So, despite the Chancellor’s change to the national insurance threshold, the year ahead still promises to be financially difficult for everyone.
Why the increase?
The government said the levy would bring in around £12billion a year. For each of the first three years, £1.8billion will help pay for social care, but most of the money will go to the NHS to help clear the backlog of waiting lists caused by the pandemic.
Financing social care is an issue that has haunted governments for decades. There have been several reviews, the most recent of which was the Dilnot commission in 2011. It recommended a lifetime cap on how much anyone should pay for care.
This would protect people from catastrophic costs if they needed care for many years and encourage the insurance industry to develop private insurance to cover care costs up to the ceiling. The Care Act 2014 largely translated the commission’s proposals into law, but its measures were not implemented at that time.
The government is now introducing a watered down version of the Dilnot reforms, funded by the new levy. Political parties have toyed with the idea of taxing wealth to pay for social care (e.g. Labor in 2010 and the Conservatives in 2017), but the new earnings levy is the preferred option of the current government.
The lifetime cap to protect individuals from catastrophic care costs will benefit older and wealthier people the most. Despite this, the elderly will only pay a fraction of the tax generated by the new levy. Ignoring the change in the national insurance threshold, the Institute for Fiscal Studies has estimated that pensioner households will only pay 2% of the amount raised by the new levy. A third will come from 50-65 year olds and two thirds from under 50 years old.
Young people have an interest in the nation having a system that can help them later, as they age themselves. But it’s hard to be sure that the current system will still be in place for decades to come, especially given the continued pressures of an aging population.
Jonquil Lowe, Lecturer in Economics and Personal Finance, The open university
This article is republished from The Conversation under a Creative Commons license. Read the original article.