Let’s face it: no one likes tax rises. But with living costs spiralling and inflation at a record high, should the UK government suspend its planned hike in National Insurance contributions (NICs)? Here’s a look at what’s happening with National Insurance and why now is maybe not the time for a rise.
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National Insurance: what’s going on?
As it stands, NICs will go up by 1.25% from 6 April 2022. This will affect the majority of people working right now, whether employed or self-employed, and it will affect employers, too.
How much you pay in NICs depends on how much you earn. If you’re employed and you earn less than £9,564 a year, then don’t worry – the rise won’t affect you. However, if you earn £20,000 a year, for example, you’ll pay an extra £130 on your tax bill. And if you earn £40,000, that’s an extra £380 to the taxman.
Why is the UK government raising NI?
Well, there are two main reasons: the NHS and social care.
Firstly, the NHS faces a huge backlog right now. The NI rise could help fund the NHS and cut waiting times, which could help more people get access to the medical treatment they need.
Secondly, the government wants to overhaul social care. It aims to:
- Cover social care costs for those with assets under £20,000;
- Contribute to social care costs for those with assets worth between £20,000 and £100,000; and
- Ensure no one pays more than £86,000 for social care, no matter how much money they have.
The government plans on funding social care reform through the NI rise. And at the moment, despite widespread criticism, the government is pressing ahead with the rise.
What does the NI rise mean for your money?
Unsurprisingly, the NI rise will pinch your wallet. So, here’s how you might manage the squeeze:
- Start an emergency fund if you don’t already have one.
- Not got a savings account yet? It’s always a good time to open one – even a few pounds a week can go a long way eventually.
- If you’re self-employed, think about how the tax increase affects you and prepare for the higher bill in advance.
- Shop around for the best prices on things you need (e.g. food and petrol).
- Up your pension contributions to lower your NI bill.
Should the government pause the NI hike for now?
According to Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, the government should scrap its plans.
She explains: “There’s no doubt that the NHS and social care need the additional funding, but tax hikes weren’t considered during the peak of the health crisis, and they shouldn’t be brought in at the peak of a cost of living crisis either.”
So, although there’s a clear need to reduce waiting times, clear the NHS backlog and fund social care, an NI rise might not be proportionate right now. And if the UK government does press ahead with the rise, it should also act to reduce living costs for everyone. For example, they might look to reduce inflation and stop energy prices from rising further.
Will the government ‘press pause’ on the NI rise, though? Right now, it’s uncertain, but we should learn more in the coming months.
Please note that tax treatment depends on the individual circumstances of each individual and may be subject to future change. The content of this article is provided for information purposes only. It is not intended to be, nor does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.