UK National Insurance hike: What it means for your finances

·4-min read
A hike in National Insurance contributions would be a breach of the Tory party's manifesto. Photo: PA
A hike in National Insurance contributions would be a breach of the Tory party's manifesto. Photo: PA

The UK government could soon raise National Insurance contributions (NIC) by 1% in an attempt to fund a £7bn ($9.5bn) shortfall in social care funding.

The Sun reported on Tuesday that prime minister Boris Johnson and chancellor Rishi Sunak are close to finalising the plan. The move could raise anywhere between £10bn to £12bn for the government, according to estimates.

Any hike would go against promises made by the Conservative party not to raise National Insurance contributions, VAT or income tax in this parliament. It would also have a direct impact on the vast majority of workers' take home pay.

"Everyone will be going home with a little bit less," Tom Selby, a senior analyst at AJ Bell, told Yahoo Finance UK.

Here's what it could mean for you:

What is National Insurance?

National Insurance is a form of social security tax introduced in 1911 to help fund the welfare state. The tax is levied on income and taken out of people's pay packets by employers before it hits workers' pockets.

Paying National Insurance allows Brits to qualify for certain benefits and the state pension. NICs is a major source of revenue for the Treasury, bringing in more than £150bn in 2021/22 and accounting for one in five pounds raised in taxation.

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Rates of National Insurance range from 5.88% for those on the lowest income to 9.7% for top earners. The government is said to be considering increasing that banding to 6.78% and 10.51%.

Who pays it? 

Almost everyone who works in the UK must pay mandatory National Insurance. Workers qualify if they are aged between 16 and 67 and are either an employee earning above £184 a week or self-employed and making a profit of £6,515 or more a year.

What would an increase mean for take home pay?

The proposed 1% hike in National Insurance would mean someone earning £30,000 a year would pay around £200 more annually, according to Sarah Coles, a personal finance analyst at Hargreaves Lansdown.

Robert Pullen, a partner at tax and advisory firm Blick Rothenberg, explained the proposals slightly differently. He said the planned increase would someone earning £20,000 per year £2 per week to, or £17 per week for someone earning £100,000 per year.

“This is not insignificant and will make a real dent in average family incomes," Pullen said.

Change won't hit everyone equally. Coles said National Insurance is a tougher tax for lower earners than income tax because NI kicks in at £9,568, while income tax only begins for earnings above £12,570.

What can you do about it?

If NIC does rise, salary sacrifice pension scheme could be a good way to save, Coles said, so Brits might want to boost their contributions. These come out of an employee's salary before tax or NI is paid.

For savers and investors, it’s worth considering whether it makes sense to take advantage of current allowances while they still can, she added.

“We can’t be certain what changes lie ahead, but we can be increasingly confident that life isn’t going to get any easier for taxpayers, and tax allowances are unlikely to get more generous,” said Coles.

What do experts think?

The proposals, although not confirmed by the government, have already proved controversial. Business leaders have called it a "jobs tax" and experts have warned it could raise issues of intergenerational unfairness.

Over 67 who stand to benefit from social care do not pay National Insurance even if they are still in work, but older people will be the ones that will need social care soonest.

"It is in the interest of all generations to reach an equitable solution, but raising National Insurance contributions fails to meet that mark and breaks the contract between generations," said James Kirkup, director of the Social Market Foundation.

"A NI increase passes the buck to poorer, working families who have suffered significant financial hardship during the pandemic, whilst protecting the wealth of asset-rich older voters."

Coles suggested introducing NIC for over-67s to help even the disparity. If it’s paid at the same rate as for working people, this would mean older people paying another £500m in tax.

Business groups have also spoken out against the proposals. Mike Cherry, national chairman of the Federation of Small Businesses (FSB), called it a "jobs tax" and said now was not the right time for tax hikes given many companies are still reeling from the pandemic.

"It is astonishing that just 24 hours after many businesses were able to re-open, ministers think now is a good time to land small firms with this bombshell," Cherry said.

"Jobs don’t create themselves. The more that the Government chooses to put up the costs of employment, the fewer jobs there’ll be for young workers who have been hit so hard by the pandemic."

Watch: When should I start paying into a pension?

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