Budgets are being revised and mitigation plans drawn up in response to Government plans for a 1.25% increase in National Insurance Contributions (NICs).
The Government has confirmed it intends to increase NICs by 1.25% from April 2022 as the first instalment of a “health and social care levy”. There will also be a 1.25% tax on share dividends from next April. The funds will be used to reduce the backlog in NHS healthcare, which sector leaders estimate will require £10 billion a year.
However, the NIC hike is only a temporary measure. From 2023, the levy will be raised by a separate 1.25% tax on earned income, with receipts tied to a long-term health and social care plan. Those past the state pension retirement age will have to pay the levy when it is introduced, although they will continue to be exempt from NICs.
Here AAT experts members and accountants share their views of the impact of the changes.
The only option is to plan for the increase
Samantha Perkin FMAAT, director, Zamu
We always knew that the money paid out for Covid-19 would have to be paid for. We were really borrowing from our future selves. I’ve warned many a client that NI is an easy target because it is poorly understood. I’m not convinced that the cost is about funding proper care for the elderly; that needs a much bigger and broader change in attitude and social change than just an increase in NICs.
Next steps: I’ve prepared all clients and their budgets for a 1% employees increase, a 2% rise for employers and for self-employed NICs to increase by 2%. Not really much planning to avoid it is possible, so you can just plan for the increase. The low avoidance rate is, in part, why HMRC picked this regressive tax.
Verdict: Businesses should plan for the increase. I’m not convinced it will bring the promised changes in the care of the elderly.
Budget revisions will be necessary, as will belt-tightening
David Frederick FMAAT, Director, Marcus Bishop Associates, AAT President
The shift is understandable, given the size of the tax gap and the need to recoup the seemingly endless pit of public funds distributed last year to keep the economy afloat. Choosing to increase NICs plays into the traditional fallacy that NIC increases are the least painful economically and politically for governments. Whilst we may reluctantly understand this proposed increase in NICS, we need to be mindful that this may be the start of a barrage of tax increases and the wholesale abandonment of ideas mooted in budget 2021 and earlier manifesto pledges.
We have been suffering belt-tightening for the past decade. So we have had Covid-19, Brexit and now the start of rising taxes. How can small businesses keep taking these knocks and setbacks on reducing margins and increasing costs? It won’t be long before we have a real small business catastrophe.
Next Steps: Revise our staff budgets and income and expenses from the date of the increase. We will also need to explain to clients that, with the extravagant behaviour of the Government last year to keep UK plc afloat, we now all have to suffer a little pain. The starting point at present is the increase in NICs, but there may be more ahead. Therefore at present, we need to exercise a little more belt-tightening to see us through.
Verdict: This will be very difficult for employers, so careful re-budgeting is a must.
An unfair method of funding that threatens recovery
Phil Hall AAT Head of Public Affairs & Public Policy
AAT agrees with the Government and others that the NHS and Social Care requires increased funding, and this should not come from more borrowing and debt. But we do not believe that a new 1.25% levy is the best means of raising much-needed funds.
The NICs rise for employers comes as they already face unprecedented challenges from staff and material shortages – and associated cost increases. Undoubtedly this will slow the UK’s economic recovery.
There are also numerous problems with the 1.25% levy based on NICs.
- NICs are due at a lower level of earnings than income tax, compounding the effect on those on low incomes. For example, someone earning £20,000 a year would have to pay an extra £104 for every 1% NICs increase compared to £74 if income tax were increased instead.
- Many earn their income solely from property and will not contribute anything towards this levy. In contrast, those earning the national minimum wage will. How can that be deemed fair?
Instead of a 1.25% levy, ending the NICs exemption for pensioners; increases in CGT (as set out in AAT’s response to the OTS review of CGT); reductions in Inheritance Tax exemptions and reliefs; and replacing the triple lock with increases in line with CPI would probably be a better way forward. None of these changes alone raises as much as a NICs increase/levy but taken together as a package would be broadly similar.
Verdict: There are better ways to raise these much-needed funds.
SMEs need to focus on NI strategies
Praveen Gupta, National Head of Tax at Azets
This increase in National Insurance (NI) tax will impact the younger population more severely than older generations, at a time when the unemployment rate among under-25s is already rising.
1.25% represents a significant tax rate hike and will have a meaningful impact on SMEs as they continue to rebuild from the pandemic and pivot their businesses in the post-Covid world.
For SMEs, there is now even more of a need to focus on NI strategies, such as salary sacrifice measures that could provide businesses and individuals with tax savings.
Verdict: a potential blow for younger employees and SMEs. Businesses need to work on strategies to mitigate the effects for themselves and their staff.
Clients should consider changing the mix of their income
Simon Smith, Partner at Wellers
National Insurance (NI) is considered an additional tax. So, the government’s thinking is that NI can be increased without increasing income tax.
What we have here is a scenario where the Government recognises that areas of the economy need additional funding, but they are reluctant to increase the basic rate of income tax, given their manifesto pledges, so instead, they have turned to NI.
From April 2022, NI contributions will rise by 1.2%. In April 2023, NI will then go back to the previous rate. However, the new ‘health and social care levy’ will be introduced at 1.25%.
This will be paid not just by those who earn salaries (employees) but by pensioners who work as well. Previously, NI contributions stopped once you reached the state pension age.
The 1.25 percentage point rise in NI will also be applied to employers’ NI contributions, so it impacts on the self-employed as well.
People who pay NI are those who earn salaries. Those who don’t earn income through salaries won’t be affected by an increase, this includes those whose main source of income is through investment, for example.
Next steps: Potential options include looking at extracting funds from companies through dividend payments or directors bonuses before the changes come into force. Alternatively, other methods of extracting funds from companies that do not attract NIC, or the new rate of dividend tax, include the drawdown of directors loans, and reviewing rents paid to directors for properties used in the business. Finally, consider the mix between dividend income versus capital gains, but be warned that capital gains tax could come under review by the Chancellor in the Autumn budget on 27 October 2021.
Mark Rowland is a journalist and former editor of Accounting Technician and 20 magazine.