The Prime Minister has just announced a National Insurance tax rise to raise an extra £12bn annually for the next three years to fund health, social care spending and emergency NHS funding in England to stem the post-Covid crisis.

The increase for employees will be 1.25% as the PM claimed, ‘A global pandemic was in no one’s manifesto” and will be a separate tax to Income Tax and National Insurance. The total increase will be of 2.5% as it includes a 1.25% NICs increase paid by employees, and a 1.25% increase paid by the employer. The new tax is meant to pay for social care costs, but some people are calling it unfair as it is targeted at lower earning, working people.

What this means in practice is that those of us in employment will pay some more tax from next April onwards:

1. People earning £10,000 a year currently pay £52 – they will pay £5 more each year (£57) as a result of the rise
2. Those on a £20,000 salary now paying £1,251 a year will pay £130 extra, a total of £1,381
3. People earning £30,000 a year now paying £2,452 will pay £255 extra, £2,707 in total
4. For those on a £40,000 salary currently paying £3,652, a rise of 1.25 percentage points means they’ll have to fork out £380 extra each year, bringing the total to £4,032
5. People who earn £50,000 a year now pay £4,852 – the tax hike means an increase to £5,357, an annual increase of £505

Anyone with assets less than £20,000 will not make any contributions, and those receiving care, the levy also means that from October 2023 they will not pay more than £86,000 in their lifetime, not including accommodation. Anyone with assets between £20,000 and £100,000 will be means tested to determine the sum.

The self-employed have been affected the hardest during the pandemic, and even though they were offered some type of help through it, still many consider will be an unfair approach considering the importance of the self-employed to speed up the economic recovery. Directors of companies were denied help during the pandemic and will also be hit hard with the new measures and are being targeted to pay for the recovery. Employers will also be in the most affected group as it will push up the costs of hiring workers, and possibly slow down employment growth in the UK. Lastly, Payroll teams will be also heavily pressured as employees, clients and businesses will need to understand the cost impact of these new measures. The least affected group are the highest earners.

For the self-employed, Class 2 self-employed NICs and class 3 NICs, which are voluntary payments made to top-up state pension gaps, are not impacted by the levy.

AIMS Accountants are available to help your business implement the announced measures and we are always happy to discuss any other of your business needs. Contact your local AIMS accountant to find out more information.