National Insurance Increases – A Clever Disguise

 

Earlier this week, the Prime Minister (and very notably not the Chancellor) announced a 1.25% rise in National Insurance Contributions (NIC) and dividend tax from 6^th April 2022.

At first glance, 1.25% seems like a small change (“just a fiver a week” was the headline banded about in some parts of the press) but looking a little deeper it becomes clear that the tax rises are wider-reaching measures than they first appeared.

What are the changes?

In a nutshell employees, employers, the self-employed and taxpayers in receipt of dividends, will all pay 1.25% more tax from April 2022.

The NI increase will apply to:

• Class 1 primary – paid by employees
• Class 1 secondary – paid by employers
• Class 4 – paid by self-employed
• Dividends

For the first year (to 6^th April 2023) the tax will be collected as an increase in NI.

From April 2023, NI will return to its current rate and extra tax will be collected as a new Health and Social Levy.

How will this affect me?

• Employees 
  • £20k annual salary – £130 annual increase
  • £30k annual salary – £255 annual increase
  • £50k annual salary – £505 annual increase
  • £75k annual salary – £818 annual increase

• Employers
  • £20k annual salary – £139 annual increase
  • £30k annual salary – £264 annual increase
  • £50k annual salary – £514 annual increase
  • £75k annual salary – £827 annual increase

• Self-employed
  • As for employees

Why is this a big deal?

• From April 2023, when the tax is collected as a Levy, this will separate out the Levy from other taxes, including NI. This gives the Chancellor scope to increase that Levy independently of other taxes if for example, “the Levy collected isn’t meeting the funding required”

• Unlike NI, the new Levy will fall on those still working but who have already reached state pension age – this is an unprecedented move

• “You’ve gotta do the math” to appreciate how much of an increase this is in relative terms. “Just a 1.25% increase”, but that’s just the % point increase not the relative increase:
  • Dividend tax for a basic rate taxpayer goes from 7.5% to 8.75% – a 16.7% relative increase
  • Class 4 NI for the self-employed goes from 9% to 10.25% – a 13.8% relative increase
  • Class 1 secondary for employers goes from 13.8% to 15.05% – a 9.1% relative increase
  • Class 1 primary for employees goes from 12% to 13.25% – a 10.4% relative increase
  • Make no mistake, on a relative scale these are big increases

• At this stage, the Government hasn’t announced any changes to NI thresholds (the point at which NI becomes payable), the basic rate or higher rate bands (the point at which PAYE & personal tax becomes payable) or the tax-free dividend allowance for 2022/23. We already know that the personal allowance for 2022/23 will be frozen until the end of 2025/26 so further tax could be generated by playing with these allowances, or by freezing them or by not increasing them in line with inflation.

• Tax planning for the 2021/22 tax year is going to even more critical than it otherwise would have been. Accelerating profit into 2021/22 will be an obvious planning point but this should be carefully considered on a case by case basis.

An apolitical look at the changes

Whatever your political persuasion, it has been generally accepted that higher earners are taxed at a higher rate, hence why we’ve had a higher rate tax band which is different to basic rate tax band for decades regardless of the party in charge.  Remember that more than 25% of all income tax revenues is paid by the top 1% of taxpayers.

The only difference, depending on the party in charge, has been the differential in the rates for higher and basic rate taxpayers.

This NI/Levy increase is however an across the board increase at the same flat rate for most taxpayers.

Increases in tax/cost of living however proportionally affect those in society who earn less (hence the rationale for different basic and higher rate tax bands).

What we appear to have here though is the worst-off in society more proportionally detrimentally affected to prevent those in society who have accumulated assets, from losing those assets to fund social care.  It’s a big change in the rhetoric as to how tax is collected and redistributed.

We can’t help but think that a long overdue reform of inheritance tax and the possible introduction of a flat wealth tax (as is present in other European countries) would have solved the equation more fairly and with greater simplicity.  From a political angle though, a 10% flat rate (for example) would have been a more difficult sell than “just a 1.25% rise in NI”.

Placing pressure on employers (and employees) to foot the bill for social care in an already pressurised post-Brexit, post-COVID world is a brave move indeed.

Furthermore, by also placing the Levy on dividends, it firms up the Government’s stance that all taxpayers should contribute, despite the fact that business owners who had structured their remuneration in a low salary/high dividend mix were unable to benefit from COVID business support on these dividend levels.  Dividends definitely didn’t count 18 months ago but most certainly do now.