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Broken Promises - an increase in National Insurance Contributions

In December 2019 when election manifestos were published, the country looked far different from where we are standing today. Mr Johnson was going to ‘get Brexit done’ and the natio...

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Date: 14/09/2021

Authors:

Gemma grunewald colour 2016

Gemma Grunewald

Senior Associate

In December 2019 when election manifestos were published, the country looked far different from where we are standing today. Mr Johnson was going to ‘get Brexit done’ and the nation looked like it might finally be on an upwards trajectory. Within his first 100 days in office, however, COVID-19 fundamentally changed the economic landscape and today it seems difficult to comprehend how those wistful election promises can remain intact. Using the pandemic as a backdrop, the government has announced an increase in National Insurance Contributions (NICs) to initially plug the gap in funding for the NHS to clear the backlog and, in the longer-term, for the social care system.

What does the increase in NICs mean for Employees and Employers?

From April 2022, under the new “Health and Social Care Levy” NICs will be increased by 1.25% for both employers and employees, amounting to a 2.5% increase in payroll taxes. This increase will also apply to self-employed individuals paying Class 4 NICs. Class 2 self-employed NICs and Class 3 NICS, which are voluntary payments made to top-up state pension gaps, will not be impacted by the levy.

From April 2023, the levy will also be paid on all earned income – meaning those working beyond state pension age, currently exempt from NICs, will also be charged.

The table below details the current Class 1 and Class 4 NICs rates and how these will change from April 2022.

Employee Class 1 NICs

Employer Class 1 NICs

Self-Employed Class 4 NICs

NICs rates for 2021/22

12% / 2%

13.8%

9% / 2%

NICs rates for 2022/23

13.25% / 3.25%

15.05%`

10.25% / 3.25%

In real terms, those earning £100,000 will face an additional annual tax charge of £1,130 – no small increase.

What does the increase in NICs mean for company shareholders?

Those who structure their earnings through a corporate body will not be spared: dividend tax rates on shares will also increase by 1.25%. From April 2022 the highest earners will be charged 39.35% on this income.

The table below details the current dividend tax rates and changes from April 2022.

Basic rate taxpayers

Higher rate taxpayers

Additional rate taxpayers

Dividend tax rates for 2021/22

7.5%

32.5%

38.1%

Dividend tax rates from 2022/23

8.75%

33.75%

39.35%

What’s next?

From 2023 the levy will be separated out into a separate tax and the government claims that NIC rates will return to their current levels. But as time has shown us, much can change in 18 months and perhaps some promises are made to be broken. In addition, if the Chancellor was prepared to take the unusual step of announcing major changes to the UK’s tax system outside of the formal Budget, it seems plausible that further tax rises are on the horizon – we await 27 October with baited breath.

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