With the UK facing a cost of living crisis and inflation running at its highest level in 30 years, the planned rise in National Insurance couldn’t have come at a worse time.
This, coupled with stagnant wages, means many are already struggling to pay the bills. With this in mind, here are three reasons why I think the government may suspend the National Insurance hike.
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What is happening with National Insurance?
Starting from the new tax year – which begins on 6th April 2022 – employees, employers and the self-employed will all have to pay 1.25% more in National Insurance.
This means that if you’re an employee earning £20,000 a year, you’ll see your annual bill increase by £130. If you earn £30,000 a year, then the hike will cost you £255. Meanwhile, if you earn £50,000, you’ll pay £505 extra.
If you’re a low earner, taking home less than £9,564 a year, you don’t pay National Insurance. This means that the planned hike won’t have an impact on you.
So, while National Insurance doesn’t apply to all employees, the general feeling is that hiking the tax is unfair. That’s because it can proportionally hit lower earners the hardest.
This is because the amount of National Insurance you pay decreases if you earn over a set threshold. For example, for those paying Class A National Insurance contributions, the percentage of tax paid decreases once you earn £967 a week. Many also believe hiking the tax is unfair as those aged 66 or over don’t have to pay it.
However, the likely reason why the government decided to hike National Insurance and not simply raise Income Tax, is because Income Tax bands are devolved issues. As a result, the UK government would have to persuade the Welsh and Scottish governments to raise their income tax levels accordingly. By raising National Insurance instead, the UK government has avoided having to make a case as the tax applies nationally.
It’s worth knowing that the hike in National Insurance only applies for one year. That’s because from the 2023/24 tax year, it will be replaced by a new Health and Social Care Levy.
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Could the planned National Insurance hike be scrapped?
The National Insurance tax hike is expected to raise £12 billion for the Treasury. Following the government’s extensive spending spree during the pandemic, and the UK’s growing social care funding gap, the increase will be a welcome source of revenue for the state.
However, the Institute for Fiscal Studies recently suggested that the National Insurance hike should be suspended for at least a year due to the current cost of living crisis. This position was also echoed by ex-minister David Davis, who wants to government to scrap the hike. So too does Lord Frost, who recently suggested the planned rise was “never necessary or justified”.
With this in mind, here are three reasons why the government may decide to put the brakes on April’s hike.
1. Inflation and bills are already soaring
Perhaps the most obvious reason for scrapping the planned hike is the current cost of living crisis faced by millions of Britons right now. Inflation is running at 5.4% – a 30-year high – and some expect it to peak at 7% later in the year.
As well as this, energy prices are certain to soar when Ofgem reviews its energy price cap in April. This will pile even more pressure on household budgets, so scrapping the National Insurance hike would come as a welcome financial relief for many.
2. Scrapping the tax makes good political sense
A number of senior political figures, including David Davis and Lord Frost, have already expressed their support for scrapping the hike.
With the prime minister already under enormous pressure, scrapping the levy may help keep him in the job for a while longer.
3. The Health and Social Care Levy is an easier sell
It is believed that much of the funds raised from the National Insurance hike will go towards clearing the NHS backlog as a result of Covid-19.
By scrapping the hike now, and going ahead with the Health and Social Care Levy next year instead, the government may find it easier to get the public, and other ministers, on board.
That’s because there is a growing recognition that the UK needs extra funding for Health and Social Care. So by putting this into a separate levy, and by giving it a credible name, it may be an easier sell as opposed to simply increasing an existing tax.
Are you worried about rising inflation? See our article that outlines three tips to help with the rising cost of living.
